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Enterprise Pillar

E3 Enterprise Strategy
25 May 2010 Tuesday Morning Session
Instructions to candidates

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).
ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.
You should show all workings as marks are available for the method you use.
The pre-seen case study material is included in this question paper on pages
2 to 6. The unseen case study material, specific to this examination, is
provided on pages 8 and 9.
Answer the compulsory questions in Section A on page 11. This page is
detachable for ease of reference.
Answer TWO of the three questions in Section B on pages 14 to 17.
Maths Tables and formulae are provided on pages 19 and 20.
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 the
questions you have answered.

E3 Enterprise Strategy

You are allowed three hours to answer this question paper.

TURN OVER

The Chartered Institute of Management Accountants 2010

Aybe
Pre-seen Case Study
Background
Aybe, located in Country C, was formed by the merger of two companies in 2001. It is a listed
company which manufactures, markets and distributes a large range of components
throughout Europe and the United States of America. Aybe employs approximately 700
people at its three factories in Eastern Europe and supplies products to over 05 million
customers in 20 countries. Aybe holds stocks of about 100,000 different electronic
components.
Aybe is regarded within its industry as being a well-established business. Company Ay had
operated successfully for nearly 17 years before its merger with Company Be. Company Ay
can therefore trace its history back for 25 years which is a long time in the fast moving
electronic component business.
The company is organised into three divisions, the Domestic Electronic Components division
(DEC), the Industrial Electronic Components division (IEC) and the Specialist Components
division (SC). The Domestic and Industrial Electronic Components divisions supply standard
electronic components for domestic and industrial use whereas the Specialist Components
division supplies components which are often unique and made to specific customer
requirements. Each of the three divisions has its own factory in Country C.
Composition of the Board of Directors
The Board of Directors has three executive directors, the Company Secretary and five nonexecutive directors. The Chairman is one of the five independent non-executive directors. The
executive directors are the Chief Executive, Finance Director and Director of Operations.
There is also an Audit Committee, a Remuneration Committee and a Nominations
Committee. All three committees are made up entirely of the non-executive directors.
Organisational structure
Aybe is organised along traditional functional/unitary lines. The Board considers continuity to
be a very important value. The present structure was established by Company Ay in 1990 and
continued after the merger with Company Be. Many of Aybes competitors have carried out
structural reorganisations since then. In 2008, Aybe commissioned a review of its
organisational structure from a human resource consultancy. The consultants suggested
alternative structures which they thought Aybe could employ to its advantage. However,
Aybes Board felt that continuity was more important and no change to the organisational
structure took place.
Product and service delivery
Customers are increasingly seeking assistance from their component suppliers with the
design of their products and the associated manufacturing and assembly processes. Aybes
Board views this as a growth area. The Board has recognised that Aybe needs to develop
web-based services and tools which can be accessed by customers. The traditional method
of listing the companys range of components in a catalogue is becoming less effective
because customers are increasingly seeking specially designed custom made components as
the electronics industry becomes more sophisticated.

May 2010

Enterprise Strategy

Financial data
Aybes historical financial record, denominated in Cs currency of C$, over the last five years
is shown below.

Year ended 31 December:


2009
2008
2007
C$m
C$m
C$m
620
600
475
41
39
35
23
21
16

Revenue
Operating profit
Profit for the year

Earnings per share (C$)


Dividend per share (C$)

0128
0064

0117
0058

0089
0

2006
C$m
433
20
9

2005
C$m
360
13
5

0050
0

0028
0

Extracts from the 2009 financial statements are given at Appendix A. There are currently 180
million ordinary shares in issue with a nominal value of C$010 each. The share price at 31
December 2009 was C$064. No dividend was paid in the three years 2005 to 2007 due to
losses sustained in the first few years after the merger in 2001.
Aybes bank has imposed an overdraft limit of C$10 million and two covenants: (i) that its
interest cover must not fall below 5 and (ii) its ratio of non-current liabilities to equity must not
increase beyond 075:1. Aybes Finance Director is comfortable with this overdraft limit and
the two covenants.
The ordinary shareholding of Aybe is broken down as follows:

Institutional investors
Executive Directors and Company Secretary
Employees
Individual investors

Percentage of ordinary shares held at 31


December 2009
55
10
5
30

The Executive Directors, Company Secretary and other senior managers are entitled to take
part in an Executive Share Option Scheme offered by Aybe.
Performance Review
Aybes three divisions have been profitable throughout the last five years. The revenue and
operating profit of the three divisions of Aybe for 2009 were as follows:

Revenue
Operating profit

DEC Division
C$m
212
14

IEC Division
C$m
284
16

SC Division
C$m
124
11

Financial objectives of Aybe


The Board has generally taken a cautious approach to providing strategic direction for the
company. Most board members feel that this has been appropriate because the company
was unprofitable for the three year period after the merger and needed to be turned around.
Also, most board members think a cautious approach has been justified given the constrained
economic circumstances which have affected Aybes markets since 2008. While
shareholders have been disappointed with Aybes performance over the last five years, they
have remained loyal and supported the Board in its attempts to move the company into profit.
The institutional shareholders however are now looking for increased growth and profitability.
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Enterprise Strategy

May 2010

The Board has set the following financial objectives which it considers reflect the caution for
which Aybe is well known:
(i)
(ii)

Dividend payout to remain at 50% of profit for the year;


No further equity shares to be issued over the next five years in order to avoid
diluting earnings per share.

Capital budget overspends


Aybe has an internal audit department. The Chief Internal Auditor, who leads this department,
reports directly to the Finance Director. Investigation by the Internal Audit department has
revealed that managers with responsibility for capital expenditure have often paid little
attention to expenditure authorisation levels approved by the Board. They have justified
overspending on the grounds that the original budgets were inadequate and in order not to
jeopardise the capital projects, the overspends were necessary.
An example of this was the building of an extension to the main factory at the DEC division
that was completed in 2009 at a final cost of nearly C$3 million which was almost 50% over
budget. The capital budget for the extension was set at the outset and the capital investment
appraisal showed a positive net present value. It subsequently became apparent that the site
clearance costs and on-going construction expenditure were under-estimated. These
estimates were provided by a qualified quantity surveyor who was a contractor to Aybe. The
estimates supplied by the quantity surveyor were accurately included in Aybes capital
investment appraisal system which was performed on a spreadsheet. However, no regular
checks were carried out to compare the phased budgeted expenditure with actual costs
incurred. It came as a surprise to the Board when the Finance Director finally produced the
capital expenditure project report which showed the cost of the extension was nearly 50%
overspent.
Strategic development
Aybe applies a traditional rational model in carrying out its strategic planning process. This
encompasses an annual exercise to review the previous plan, creation of a revenue and
capital budget for the next five years and instruction to managers within Aybe to maintain their
expenditure within the budget limits approved by the Board.
Debates have taken place within the Board regarding the strategic direction in which Aybe
should move. Most board members are generally satisfied that Aybe has been turned around
over the last five years and were pleased that the company increased its profit in 2009 even
though the global economy slowed down. Aybe benefited from a number of long-term
contractual arrangements with customers throughout 2009 which were agreed in previous
years. However, many of these are not being renewed due to the current economic climate.
The Board stated in its annual report, published in March 2010, that the overall strategic aim
of the company is to:
Achieve growth and increase shareholder returns by continuing to produce and distribute
high quality electronic components and develop our international presence through expansion
into new overseas markets.
Aybes Chief Executive said in the annual report that the strategic aim is clear and
straightforward. He said Aybe will strive to maintain its share of the electronic development,
operational, maintenance and repair markets in which it is engaged. This is despite the global
economic difficulties which Aybe, along with its competitors, has faced since 2008. Aybe will
continue to apply the highest ethical standards in its business activities.

May 2010

Enterprise Strategy

In order to facilitate the achievement of the strategic aim, Aybes Board has established the
following strategic goals:
1.
2.
3.
4.

Enhance the provision of products and services which are demanded by customers;
Invest in engineering and web-based support for customers;
Maintain the search for environmentally friendly products;
Pursue options for expansion into new overseas markets.

The Board has also stated that Aybe is a responsible corporate organisation and recognises
the social and environmental effects of its operational activities.
Concern over the rate of growth
Aybes recently appointed Director of Operations and one of its Non-Executive Directors have
privately expressed their concern to the Chief Executive at what they perceive to be the very
slow growth of the company. While they accept that shareholder expectations should not be
raised too high, they feel that the Board is not providing sufficient impetus to move the
company forward. They fear that the results for 2010 will be worse than for 2009. They think
that Aybe should be much more ambitious and fear that the institutional shareholders in
particular, will not remain patient if Aybe does not create stronger earnings growth than has
previously been achieved.
Development approaches
The Board has discussed different ways of expanding overseas in order to meet the overall
strategic aim. It has, in the past, been reluctant to move from the current approach of
exporting components. However the Director of Operations has now begun preparing a plan
for the IEC division to open up a trading company in Asia. The DEC division is also
establishing a subsidiary in Africa.

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Enterprise Strategy

May 2010

APPENDIX A
Extracts of Aybes Income Statement and Statement of Financial Position
Income statement for the year ended 31 December 2009
2009
C$million
620
(579)
( 4)
37
( 14)
23

Revenue
Operating costs
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Statement of financial position as at 31 December 2009

2009
C$million
ASSETS
Non-current assets

111

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets

40
81
3
124
235

EQUITY AND LIABILITIES


Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity

18
9
8
75
110

Non-current liabilities
Bank loan (8% interest, repayable 2015)

40

Current liabilities
Trade and other payables
Current tax payable
Bank overdraft
Total current liabilities
Total liabilities
Total equity and liabilities

73
8
4
85
125
235

End of Pre-seen Material


The unseen material begins on page 8

May 2010

Enterprise Strategy

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Enterprise Strategy

May 2010

SECTION A 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER THIS QUESTION
Question One
Unseen material for Case Study
The business environment in Asia
Aybe has taken advice from a number of expert sources about market prospects in Asia. The
research concluded Asian markets have excellent potential for growth and profitability,
because of increasing industrialisation, for one of Aybes divisions, IEC. The markets are fastmoving and highly adaptive. Some countries in Asia are highly entrepreneurial whilst in others
there is much involvement of the State in business. In some countries there is a mixed
economy. In general, Asia encourages free markets but this is also allied to a requirement in
some countries for local involvement in any business enterprise. Most Asian countries make
extensive use of sophisticated information systems and information technology. A
considerable amount of outsourcing from Western countries has taken place to Asias benefit.
Although this had originally been in areas of manufacturing, outsourcing has now developed
extensively and many service and administrative functions have also been outsourced to
Asia. All of these influences have led to a variety of organisational structures in Asian
business.
Director of Operations
Aybe is organised along traditional functional lines and one of the most important
departments is Operations. The director with responsibility for this department is the Director
of Operations. The Director of Operations had recently joined Aybe and one of the reasons for
his appointment was his experience in managing the electronics division of a multinational
company in China. He is very energetic and ambitious and had been supported in his
appointment at Aybe by the Non-Executive Director (NED) who chairs the Nominations
Committee. This NED considers that the Director of Operations has the potential to become
the Chief Executive Officer (CEO) of Aybe within the next five years.
Expansion of electronic components business into Asia
Prior to 2010, the IEC division of Aybe had carried out a limited amount of business in Asia.
The results of this business are shown in the column Actual 2009.
Aybes Management Accountant has prepared a forecast for the period 31 December 2010 to
2014 which shows the incremental effects of expansion into Asia of products from the IEC
division. Aybe has been fortunate in that the Asian government in the country where it intends
to trade has granted a tax holiday for eight years to new overseas businesses. This means
that Aybes operations will not be liable to tax. Country C has a double taxation treaty with the
Asian country. This forecast is shown below:

Incremental revenue
Incremental costs
Incremental profit for the
year
Incremental earnings per
share
Incremental dividend per
share

May 2010

Actual
2009
C$m

Forecast
2010
C$m

Forecast
2011
C$m

Forecast
2012
C$m

Forecast
2013
C$m

Forecast
2014
C$m

5.00
1.00
4.00

5.15
1.03
4.12

5.30
1.06
4.24

5.46
1.09
4.37

5.63
1.13
4.50

5.80
1.16
4.64

C$
0.022

C$
0.023

C$
0.024

C$
0.024

C$
0.025

C$
0.026

0.011

0.011

0.012

0.012

0.013

0.013

Enterprise Strategy

In preparing this forecast the Management Accountant has used a well established procedure
within Aybe which included detailed consultation with Board members and operational
managers. Additionally, external market research had been commissioned to assist with such
matters as potential demand and customer preferences. Discussion, consultation and
consensus have always been considered important aspects of strategic decision-making
within Aybe and the Management Accountant has been praised by the Finance Director for
following this procedure in her preparation of the five year forecast.
The Director of Operations and Management Accountant
A Board meeting has been scheduled to discuss the continued expansion into Asia. Prior to
this, the Director of Operations had asked for a meeting with the Management Accountant to
discuss her forecast. At the meeting the Director of Operations was extremely critical about
the profit projections within the forecast and he enquired how these had been constructed.
The Management Accountant explained that there had been a wide process of consultation
both inside and outside of Aybe and that she had followed the normal company procedure for
preparing the forecast.
The Director of Operations said that the normal procedures within Aybe were 50 years out of
date. He said that business is dynamic and that planning just slowed everything down. He
stated that the best way of making strategy was to react to events and to seize opportunities
and that consultation and consensus resulted in stagnation. As regards the Management
Accountants profit projections, he felt these were totally unrealistic. The Director of
Operations said that he has extensive experience of the electronics markets in Asia, and this,
together with his instincts, has led him to a completely different view of the potential for Aybe
if the expansion took place.
The Director of Operations then stated the following assumptions for the incremental effects
of the Asian expansion:
a.

Take the actual results given above for year ended 31 December 2009 as the
base year for the forecast.

b.

Revenue will increase by 25% compound per year from the base year to the end
of the forecast period.

c.

Incremental operating costs will be 20% of revenue each year during the forecast
period.

The Director of Operations instructed the Management Accountant to prepare a new five year
forecast, for presentation at the Board meeting, using the above assumptions. The Director of
Operations instructed the Management Accountant to destroy her original forecast. The
Management Accountant stated that this was not the way things are normally done at Aybe
and that the Director of Operations projections for revenue were unrealistically optimistic. The
Director of Operations replied that it was not the role of a management accountant to question
a directors professional expertise but rather a good management accountant should help him
by carrying out his requests. The Director of Operations was not willing to discuss the matter
further with the Management Accountant and pointed out that he had the unqualified support
of a NED. The Director of Operations insisted the management accountant do the following:

Produce a revised five year forecast incorporating the Director of Operations


assumptions;

Present the revised forecast at the forthcoming Board meeting;

Destroy the Management Accountants original forecast.

The requirement for Question One is on page 11 which is


detachable for ease of reference
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Enterprise Strategy

May 2010

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May 2010

10

Enterprise Strategy

Required
(a)

(b)

(i)

Discuss the relevance of the style of strategy currently in use at Aybe to the
development of the Asian markets.
(5 marks)

(ii)

Advise the Board of two alternative approaches to strategy which you


consider Aybe could use in the development of the Asian markets. Explain
why you consider your choices may be appropriate.
(6 marks)

Evaluate the suitability of Aybes current organisational structure in respect of the


proposed expansion into Asian markets.
(9 marks)

(c)
(i)

Explain two control problems Aybe might encounter if it chooses to conduct


its business in Asia using agents.
(4 marks)

(ii)

Advise Aybe of appropriate control measures it could use to deal with the
problems you have explained in (c)(i).
(6 marks)

(i)

Construct an incremental profit forecast for the Asian expansion for the
period 2010 2014 using the assumptions proposed by the Director of
Operations and the actual results for year ended 31 December 2009.

(d)

(4 marks)
(ii)

Discuss the consequences for the shareholders of the revised incremental


profit forecast constructed in d(i).
(6 marks)

(iii)

Evaluate how the views of the Director of Operations about the Management
Accountants profit forecast and the role of management accountants
represent an ethical dilemma for the Management Accountant of Aybe.
(10 marks)
(Total marks for Question One = 50 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 14
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Enterprise Strategy

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May 2010

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May 2010

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Enterprise Strategy

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Enterprise Strategy

13

May 2010

SECTION B 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER TWO OF THE THREE QUESTIONS 25 MARKS EACH
Question Two
JGS is a long-established retailer which specialises in the sale of antiques*. JGS is owned by
a married couple who both work in the business. They have no employees. Their premises
consist of a large modern shop and there is an apartment above this in which the owners live.
Over the last five years the local area has become very fashionable and the shop is now
surrounded by smart restaurants, cafes and up-market fashion outlets. This area has also
become a very popular place to live which has meant that property values have increased
substantially. The owners believe that if they disposed of their premises they would make a
substantial capital gain. The owners have noticed that the fixed costs of their property,
including insurance, local tax, security and maintenance have risen very sharply during the
last five years.
Since establishing the business the owners have developed their expertise. They now have a
national reputation in the antiques trade and many repeat customers. They traded profitably
between 1980 and 2008 but in the last year have made an operating loss for the first time.
The owners are often consulted by other antique traders and collectors by letter and
telephone and they have developed a considerable income stream by charging for their
advice. However, they have found that their location is becoming increasingly problematic.
Although the popularity of their area of town has increased and led to many more people
living and visiting the area, unfortunately for the owners most of these people are not
interested in antiques. They are young people who like the area but do not have the
disposable income to spend on antiques.
A further problem is that the shop is not situated in a large city and it is very inconvenient for
many antique traders and collectors to visit. The owners believe the location has recently
restricted the success of their business. The owners know that a very popular development in
the antiques trade has been the establishment of Antiques Fairs where antiques are bought
and sold. Some of these have established international reputations and have many thousands
of visitors. However, because of JGSs location and the need to keep their shop open, the
owners do not attend these. The owners recently set up a website which has basic
information about their business on it such as their address, telephone number and the
opening times of their shop. The website has received a large number of hits but it does not
seem to have increased sales.

Antique = a decorative object that is valuable because of its age. (Oxford Concise
Dictionary)

The requirement for Question Two is on the opposite page

May 2010

14

Enterprise Strategy

Required
(a)

Analyse the strengths and weaknesses of JGS using the value chain model.
Note: You are not required to draw a value chain diagram in any part of your
answer to this question.
(8 marks)

(b)

The owners propose to convert their website to facilitate e-commerce in order


to increase turnover and profit.
Advise the owners of JGS what they will have to do immediately, and also on
a continuing basis, to carry out this e-commerce solution.
(8 marks)

(c)

Evaluate how the introduction of e-commerce could affect JGSs value chain.
(9 marks)
(Total for Question Two = 25 marks)

Section B continues on the next page

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Enterprise Strategy

15

May 2010

Question Three
In a widely published model, Johnson, Scholes and Whittington characterise the strategic
management process as consisting of three inter-related elements:

strategic analysis
strategic choice
strategic implementation

Required:
(a) Explain why strategic implementation is included in the Johnson, Scholes and
Whittington model.
Note: You are not required to draw the model.
(5 marks)
RCH, an international hotel group with a very strong brand image has recently taken over
TDM, an educational institution based in Western Europe. RCH has a very good reputation
for improving the profitability of its business units and prides itself on its customer focus. The
CEO of RCH was recently quoted as saying Our success is built on happy customers: we
give them what they want. RCH continually conducts market and customer research and
uses the results of these researches to inform both its operational and longer term strategies.
TDM is well-established and has always traded profitably. It offers a variety of courses
including degrees both at Bachelor and Masters levels and courses aimed at professional
qualifications. TDM has always concentrated on the quality of its courses and learning
materials. TDM has never seen the need for market and customer research as it has always
achieved its sales targets. Its students consistently achieve passes on a par with the national
average. TDM has always had the largest market share in its sector even though new
entrants continually enter the market. TDM has a good reputation and has not felt the need to
invest significantly in marketing activities. In recent years, TDM has experienced an
increasing rate of employee turnover.
RCH has developed a sophisticated set of Critical Success Factors which is integrated into its
real-time information system. RCHs rationale for the take-over of TDM was the belief that it
could export its customer focus and control system, based on Critical Success Factors, to
TDM. RCH believed that this would transform TDMs performance and increase the wealth of
RCHs shareholders.

Required
(b)
(i)

Identify four Critical Success Factors which would be appropriate to use


for TDM.
(4 marks)

(ii)

Recommend, with reasons, two Key Performance Indicators to support


each of the four Critical Success Factors you have identified.
(16 marks)
(Total for Question Three = 25 marks)

Section B continues on the opposite page

May 2010

16

Enterprise Strategy

Question Four
XZY, a publicly quoted company has expanded rapidly since its formation in 2005. Its rapid
growth rate, based on a broad range of well-regarded products manufactured and sold
exclusively within Asia, has led to high profits and an ever increasing share price. However, in
the last year, XZY has found its growth rate difficult to sustain. XZYs core strategy has been
described by its CEO as selling what we know to who we know. However, this view has been
criticised by a number of financial analysts and journalists who have warned that if XZYs
growth rate is not maintained its share price will fall and the value of the company will reduce.
XZY has a functional organisational structure and currently employs around 800 employees.
The number of employees has grown by 20% since 2008.

Required:
(a)

Evaluate, using Ansoffs product market scope matrix, the alternative strategies
XZY could follow to maintain its growth rate in profits and share price.
Note: Ansoffs model is also described as the growth vector matrix. You are not
required to draw this model.
(12 marks)

The Human Resource Director of XZY has suggested that she carries out a review of XZY
with the purpose of saving a significant amount of money by reorganising the company and
reducing employee numbers. In this way, she considers she would be making a contribution
towards maintaining XZYs profit growth rate. The CEO is interested in this idea but he is
aware that changing organisational structure can be difficult. The CEO knows from his
previous experience that such reorganisations do not always achieve their intended results.

Required
(b)

Advise the CEO of the difficulties which may be encountered in changing the
organisational structure of XZY and reducing employee numbers.
(5 marks)

(c)

Recommend how the CEO could manage the process of changing the
organisational structure.
(8 marks)
(Total for Question Four = 25 marks)

End of Question Paper


Maths Tables and Formulae are on Pages 19 and 20

Enterprise Strategy

17

May 2010

This page is blank

May 2010

18

Enterprise Strategy

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
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820

2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673

3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124

12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104

13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087

Enterprise Strategy

Interest rates (r)


4%
5%
0.962
0.952
0.925
0.907
0.889
0.864
0.855
0.823
0.822
0.784
0.790
0.746
0.760
0.711
0.731
0.677
0.703
0.645
0.676
0.614
0.650
0.585
0.625
0.557
0.601
0.530
0.577
0.505
0.555
0.481
0.534
0.458
0.513
0.436
0.494
0.416
0.475
0.396
0.456
0.377

6%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312

7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258

8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215

9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178

10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149

Interest rates (r)


14%
15%
16%
0.877
0.870
0.862
0.769
0.756
0.743
0.675
0.658
0.641
0.592
0.572
0.552
0.519
0.497
0.476
0.456
0.432
0.410
0.400
0.376
0.354
0.351
0.327
0.305
0.308
0.284
0.263
0.270
0.247
0.227
0.237
0.215
0.195
0.208
0.187
0.168
0.182
0.163
0.145
0.160
0.141
0.125
0.140
0.123
0.108
0.123
0.107
0.093
0.108
0.093
0.080
0.095
0.081
0.069
0.083
0.070
0.060
0.073
0.061
0.051

17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043

18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037

19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031

20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026

19

May 2010

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

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046

2%
0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.679
16.351

3%
0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.878

Interest rates (r)


4%
5%
6%
0.962
0.952
0.943
1.886
1.859
1.833
2.775
2.723
2.673
3.630
3.546
3.465
4.452
4.329
4.212
5.242
5.076
4.917
6.002
5.786
5.582
6.733
6.463
6.210
7.435
7.108
6.802
8.111
7.722
7.360
8.760
8.306
7.887
9.385
8.863
8.384
9.986
9.394
8.853
10.563 9.899
9.295
11.118 10.380 9.712
11.652 10.838 10.106
12.166 11.274 10.477
12.659 11.690 10.828
13.134 12.085 11.158
13.590 12.462 11.470

7%
0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594

8%
0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818

9%
0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129

10%
0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963

12%
0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469

13%
0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025

Interest rates (r)


14%
15%
16%
0.877
0.870
0.862
1.647
1.626
1.605
2.322
2.283
2.246
2.914
2.855
2.798
3.433
3.352
3.274
3.889
3.784
3.685
4.288
4.160
4.039
4.639
4.487
4.344
4.946
4.772
4.607
5.216
5.019
4.833
5.453
5.234
5.029
5.660
5.421
5.197
5.842
5.583
5.342
6.002
5.724
5.468
6.142
5.847
5.575
6.265
5.954
5.668
6.373
6.047
5.749
6.467
6.128
5.818
6.550
6.198
5.877
6.623
6.259
5.929

17%
0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628

18%
0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
7.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353

19%
0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101

20%
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
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:

1
1
1
n
r
[1 + r ]

PV =

Perpetuity

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

PV =

1
r

May 2010

20

Enterprise Strategy

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Enterprise Strategy

21

May 2010

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May 2010

22

Enterprise Strategy

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
Level 1 - KNOWLEDGE
What you are expected to know.

Level 2 - COMPREHENSION
What you are expected to understand.

VERBS USED

DEFINITION

List
State
Define

Make a list of
Express, fully or clearly, the details/facts of
Give the exact meaning of

Describe
Distinguish
Explain

Communicate the key features


Highlight the differences between
Make clear or intelligible/State the meaning or
purpose of
Recognise, establish or select after
consideration
Use an example to describe or explain
something

Identify
Illustrate
Level 3 - APPLICATION
How you are expected to apply your knowledge.

Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate

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

Level 5 - EVALUATION
How are you expected to use your learning to
evaluate, make decisions or recommendations.

Enterprise Strategy

Analyse
Categorise
Compare and contrast

Put to practical use


Ascertain or reckon mathematically
Prove with certainty or to exhibit by
practical means
Make or get ready for use
Make or prove consistent/compatible
Find an answer to
Arrange in a table

Construct
Discuss
Interpret
Prioritise
Produce

Examine in detail the structure of


Place into a defined class or division
Show the similarities and/or differences
between
Build up or compile
Examine in detail by argument
Translate into intelligible or familiar terms
Place in order of priority or sequence for action
Create or bring into existence

Advise
Evaluate
Recommend

Counsel, inform or notify


Appraise or assess the value of
Advise on a course of action

23

May 2010

Enterprise Pillar

Strategic Level Paper

E3 Enterprise Strategy

May 2010

Tuesday Morning Session

May 2010

24

Enterprise Strategy

The Examiner's Answers May 2010


E3 - Enterprise Strategy
SECTION A
Answer to Question One
Requirement (a)(i)
The style of strategy employed by Aybe is that of strategic planning. The case tells us that
Aybe applies a traditional rational model. This approach has been employed to good effect in
environments which are relatively stable and well understood by the organisation. However,
the environments of the Asian markets, as described in the case, are fast-moving whereas
rational strategic planning is not. The markets are highly adaptive and strategic planning may
not be able to cope with this. Furthermore, the market structures vary from entrepreneurial to
those with state planning. In these conditions, the traditional rational approach would not be
the most relevant one for Aybe to use.

Requirement (a)(ii)
Aybe could also use these approaches:
Opportunism or freewheeling opportunism: this would imply not preparing plans as such,
but rather taking advantage of opportunities as they arise. This approach mirrors that of the
Director of Operations and could be suitable in an environment subject to considerable,
frequent and unforseeable changes.
Incrementalism or logical incrementalism: this is an adaptive approach to strategy which
involves making small changes to strategy in the light of changing conditions. It is a
conservative, rather than a radical, approach; Evolution not Revolution. This approach might
suit Aybe as a first move away from the constraints of strategic planning.
Emergent: this approach, after Mintzberg, regards strategy not as a mechanistic process but
as an organic one. Instead of there being a top-down procedure for the development of
strategy (i.e. as in Planning), the strategy is developed in response to environmental
conditions and is highly adaptive. This could suit Aybe as it moves into an unfamiliar
environment.
Answers based on positioning and resource based strategy also earned marks
Note: Only two approaches were required from candidates

Requirement (b)
In order to evaluate the suitability of Aybes current organisational structure for its proposed
expansion into Asian markets, its salient features are described and compared to the
environmental conditions which Aybe is likely to encounter in Asia.
Currently, Aybe has an organisational structure which 'is organised along traditional functional
lines. This is similar to many companies and is reflected in the composition of the Board of

Enterprise Strategy

May 2010

Directors, for example, there is a Finance Director and an Operations Director. It would be
reasonable to expect that Aybe has departments corresponding to the different functions
carried out within its business; for example, there will probably be a Marketing department
and a Production department. These departments would have established zones of authority
and responsibility and would benefit from periodic reporting of their results including
performance against budget targets.
However, such a structure has disadvantages. Over time it can become stagnant and
bureaucratic and it may be hard for enterprise to flourish in such a culture. This could be the
situation within Aybe which has not engaged in re-organisation unlike many of its competitors:
this could imply a resistance to change. There are other disadvantages in Aybes structure.
The functional departments do not necessarily reflect the value-creating processes within
Aybe. Thus, the demarcation of the divisions by their products is necessarily an arbitrary one
and, in practice, some products may overlap more than one division. The functional structure
may also lead to a silo mentality where employees only think and are concerned about their
particular part of Aybe. This tendency could be to the detriment of Aybes efficiency and
profitability and lead to lower customer satisfaction. Aybe had maintained the same structure
since 1990 although many of its competitors had reorganised since then. In 2008 consultants
had suggested alternative structures for Aybe but it had still not changed. These factors
strongly imply that by 2010 Aybe's organisational structures had become outdated.
The environment within Asia has some environmental conditions which throw into question
the suitability of Aybes current organisational structure for doing business there. These are:
The markets are fast-moving and highly adaptive. If Aybes organisational structure has led
to stagnation and bureaucracy, this may make the current structure unsuitable as it will not be
able to respond speedily and flexibly to the business environment.
Some countries in Asia are highly entrepreneurial. If Aybes structure has led to a culture
where enterprise does not flourish, Aybe may encounter difficulties in highly entrepreneurial
countries as entrepreneurs do business in ways that Aybe may not be accustomed to; for
example, entrepreneurs are often very decisive and expect this quality from others. Aybe may
not be able to accommodate this.
(In some countries)...there is much involvement of the State in business. This may create
problems for Aybe but they will not necessarily be ones to do with the organisational
structure.
In some countries there is a mixed economy. Aybe has a record of doing business in both
America and Europe and should have experience of doing business where the Government is
also involved in business; for example, in the UK the Government controls the nuclear power
industry and some of the railways.
Asia encourages free markets. This should not create difficulties for Aybe.
(In some countries there is) a requirement ..for a local involvement in any business
enterprise. In such a country, Aybe may be obliged to accommodate a local presence in
ownership and possible local representation on its Board and in its workforce. In order to
satisfy this requirement Aybe would have to change its organisational structure.
As Aybe will face a variety of new environmental conditions in Asia, its current organisational
structure is likely to be unsuitable.

Requirement (c)(i)
If Aybe chooses to conduct its business in Asia using agents, this effectively represents a
substantial degree of delegation. The agents will be independent businesses over which Aybe
has no direct control. This gives rise to the following types of control problem:
Probity
The Asian customers will have a relationship directly with the agent and indirectly with Aybe.
Thus, anything the agent does will reflect upon Aybe; for example, if an agent was to conduct
dishonest advertising and make unrealistic claims about Aybes products, this could affect
Aybes reputation.

May 2010

Enterprise Strategy

Performance
If Aybe uses agents, it has delegated the responsibility for market development and profitability
to an organisation over which it has no direct control. Aybe could find that the agent has different
objectives to itself: the agent might want very rapid growth whereas Aybe might wish to grow
more conservatively. The agent may have divided loyalties as it is likely to hold agencies from a
number of clients and some of these may be competitors of Aybe. Agents, as independent
organisations, have autonomy from Aybe and this must be respected. However, this autonomy
does imply severe restrictions on Aybes ability to control.
Culture
In the agents country, business may be conducted differently to how it is carried out in Aybes
home country; for example, the amount of time for which trade credit is extended may be
shorter/longer than in Aybes home country. If Aybe tries to impose its usual trade credit terms
upon its agents/customers, this could cause difficulties.
Communication
Although modern communications are very efficient there still remain difficulties for Aybe trying to
control its agents in Asia. Time differences must be taken into account and Internet and
telephone communication are not always reliable. In addition, language differences will also
complicate communication.

Requirement (c)(ii)
Probity
Aybe should enquire into any potential agents background and trading record. It could utilise
published financial statements, bankers references and specialist agencies such as D&B (Dun &
Bradstreet). Requirements could be incorporated in the agency agreement to govern the agents
behaviour.
Performance
Objectives and performance measures should be a part of the agency agreement and Aybe
could require regular reports from the agent as well as the right to inspect its internal accounts.
Culture
Aybe may have to accept the different cultural practices that exist within the agents country.
However, the agency agreement should delineate boundaries that are mutually acceptable.
Communication
As with culture, some of these problems are likely to be insoluble. However, Aybe might
overcome some difficulties by requiring the agent to make periodic visits to Aybes offices and
this could be supplemented by Aybe personnel making visits to the agents premises. Such visits
could be carried out by Aybes internal auditors.
Note: The discussion under (C)(i) and (C)(ii) is not exhaustive but illustrative and whilst the
question asks for two control problems, four have been given by way of example. Candidates are
always given credit for appropriate answers.

Requirement (d)(i)
Director of Operations 5 year forecast
Actual
2009
C$m

Forecast
2010
C$m

Forecast
2011
C$m

Forecast
2012
C$m

Forecast
2013
C$m

Forecast
2014
C$m

Incremental revenue

5.00

6.25

7.81

9.77

12.21

15.26

Incremental costs

1.00

1.25

1.56

1.95

2.44

3.05

Incremental profit for


the year

4.00

5.00

6.25

7.82

9.77

12.21

Year ending 31/12

Enterprise Strategy

May 2010

Requirement (d)(ii)
From the incremental profit forecast it is possible to derive the following forecasts:
Years

C$
2009

C$
2010

C$
2011

C$
2012

C$
2013

C$
2014

Earnings per share

0.022

0.028

0.035

0.043

0.054

0.068

Dividend per share

0.011

0.014

0.017

0.022

0.027

0.034

The Director of Operations assumptions about the future are much more optimistic than those of
the Management Accountant and this is reflected in both the Earnings per share and the
Dividend forecasts. By 2014, for example, the Director of Operations Dividend forecast is 262%
of that of the Management Accountant (C$ 0.034 c.f. C$ 0.013). It is not clear what the source of
the Director of Operations assumptions is. If they are based on expert knowledge of the market,
then the shareholders should benefit from the proposed expansion. Has the Director got access
to other relevant information that he has not disclosed to the Management Accountant? If the
assumptions are not based on expert knowledge, then the prospects for Aybes expansion are
not so bright.

Requirement (d)(iii)
The Management Accountant has prepared a profit forecast according to Aybes normal
procedures. The Director of Operations believes that this forecast is totally unrealistic. At this
point, there is clearly a conflict, which is not unusual, but this does not necessarily constitute an
ethical dilemma. However, the Director of Operations explains that a management accountant
should not question a directors professional expertise and that a good management
accountant should help him by carrying out his requests. The Director of Operations further
instructs the Management Accountant to prepare a new profit forecast, based on the Director of
Operations assumptions, for presentation to the Board of Aybe and that the Management
Accountant should destroy her original profit forecast.
The Management Accountant is now in a difficult position. One of the roles of a management
accountant is to assist decision-makers and the Director of Operations is asking for such
assistance. The Management Accountant should also recognise that the Director of Operations
has expertise outside the Management Accountants experience and should, within limits, defer
to the Director of Operations greater knowledge.
However, the Management Accountant has followed the normal procedure within Aybe for
preparing such a forecast and has consulted both with board members and operational
managers. The assumptions within the Management Accountants profit forecast reflect not just
her own views but also those of her colleagues. Just as she owes a duty to the Director of
Operations to assist him in his decision-making, she owes a similar duty to Aybe and those who
are involved with the decision to transact business in Asia. The Chartered Institute of
Management Accountants (CIMA) has adopted a Code of Ethics (hereafter the Code) to give
guidance to its members with regard to their behaviour when faced with situations such as these.
CIMA has established fundamental principles of professional ethics for professional accountants
and these include the following:
Integrity A professional accountant should be straightforward and honest in all professional and
business relationships.
CIMA further states that A professional accountant should not be associated with reports etc.
where they believe that the information:
Omits or obscures information required to be included where such omission or obscurity would
be misleading.
It is arguable that if the Management Accountant carried out the Director of Operations
instruction she would be in conflict with the principle of integrity described above in that her own
more conservative forecast would not be placed before the Board. It is arguable that such
behaviour is not straightforward and honest.

May 2010

Enterprise Strategy

CIMA has also defined a further principle, that of Objectivity: A professional accountant should
not allow bias, conflict of interest or undue influence of others to override professional or
business judgements.
The principle of objectivity imposes an obligation on all professional accountants not to
compromise their professional or business judgement because of bias, conflict of interest or the
undue influence of others.
It is arguable that the Director of Operations is using his position and personality to make the
Management Accountant suppress her conservative profit forecast in favour of his more
optimistic one.
If the Management Accountant were to be given the opportunity to present both profit forecasts
to the Board with both her and the Director of Operations given the opportunity to explain their
differing points of view, there would not be an ethical dilemma.
However, because the Director of Operations has instructed the Management Accountant to
destroy her forecast, such behaviour would conflict with the principles of Integrity and Objectivity.
Therefore, an ethical dilemma exists.
All the quotations in this section are from the CIMA Code of Ethics for Professional Accountants,
October 2007.

Enterprise Strategy

May 2010

SECTION B
Answer to Question Two
Requirement (a)
Using the categories of Porters value chain the business has the following strengths and
weaknesses:
Primary activities
Inbound logistics
No information given, so unable to classify this.
Operations
The business has outgrown the need for shop premises. The owners are unable to attend
antiques fairs which have very good business potential. WEAKNESS.
Outbound logistics
The assumption is that storage and distribution is carried out at the shop premises. Mention
was made in the case of the increasing cost of security, as the antiques require protection
from theft. It could be that the shop premises are no longer the best place to store and
distribute antiques. Possible WEAKNESS.
Marketing & Sales
The owners used to gain their business because of their location, but this is no longer as
important. Latterly, they have built up a reputation and have many repeat customers.
However, their use of the Internet is primitive and does not contribute to their business. This
was a strength now turning into a WEAKNESS.
Service
As the owners have a national reputation and many repeat customers, this is classified as a
STRENGTH.
Support Activities
Firm infrastructure
The owners have had a long history of profitable trading. However, recently they have made
losses. WEAKNESS.
The owners premises, if sold, would enable them to realise a substantial capital gain.
STRENGTH.
Human Resource Management
The owners work in the business and there are no employees. Their long survival in the
business and their reputation as experts are STRENGTHS.
However, the people are the business and there is little possibility of succession. Further if the
owners have been in business since 1980 they may be approaching retirement age.
WEAKNESS.
Technology development
This seems to have been neglected. See Marketing & Sales.
Procurement
No direct evidence of this but longevity of business suggest that this has been a STRENGTH.

Requirement (b)
The owners have recently set up a website but this only has some basic information about
their business. Although the website has received many hits, it hasnt led to any increase in
business. This suggests there is a wide degree of interest in their business but the website
does not enable anyone who is remote from the town where JGS is based to do any business

May 2010

Enterprise Strategy

with the owners. The obvious inference is that if they converted their website to facilitate ecommerce their business would increase in both turnover and profit.
Initial steps to take in the introduction of e-commerce would include preparing a project plan
and also identifying the level and source of funds which would be required. If the owners are
to set up a website with e-commerce capability they will need to catalogue, photograph and
enter their stock onto the web site. The website would need continual up-dating as stock is
sold and new stock acquired. They would have to ensure that their server had adequate
capacity to cope with the forecast level of traffic. The website would need to have good
security to protect against viruses and fraud, and the owners would need to have a secure
method of receiving payments to facilitate their customers transactions. If the owners do not
have the requisite expertise, they will need to employ a consultant to help them establish the
website, to give them some training and to be available to help with website modifications and
emergencies.
All of the above will require a significant financial investment.

Requirement (c)
A move to e-commerce for the owners would affect the value chain of the owners in the
following ways. If trading via the website takes off, the owners do not need to keep their shop.
They will no longer be tied to a specific location and they could move their business. They will
also save money on the shops fixed costs if they relocate to a cheaper area. Thus, their
Operations will have altered.
The Outbound logistics of the business will be affected in a similar way to Operations.
Marketing & Sales: e-commerce represents a new way of doing business. It should lead to
increased business as the owners are no longer subject to geographical boundaries and their
antiques will be displayed on the web.
Firm infrastructure: the change to e-commerce could mean that the owners could return to
profitability. They will also be able to realise their inherent capital gain on disposal of the shop
and should benefit from an injection of cash.
Human Resource Management: e-commerce implies a new way of working for the owners.
They can now attend fairs and travel which they have not been able to do previously as they
will no longer be tied to their shop.
Technology development: with the adaption of e-commerce this aspect of the value chain
will now be an important part of the business.
Procurement: the owners new website will put them in touch with a greater number of
customers. This could give them access to new sources of supply of antiques.

Enterprise Strategy

May 2010

Answer to Question Three

Requirement (a)
Implementation has been defined as: the conversion of the strategy into detailed plans or
objectives for operational units. Implementation is an essential part of the model because no
matter how good the strategic analysis and strategic choice have been, unless a proposed
strategy is capable of being put into action there will be no benefit to the organisation.
In Johnson, Scholes and Whittingtons model, each of the three aspects are given equal
weighting. The model represents these aspects as being inter-dependent; that is, they all
inform each other. Thus, for example, Strategic Implementation is inter-linked with both
Strategic Analysis and Strategic Choice. The elements affect each other and overlap. The
model is not linear; i.e. there is not a definite pathway through the model. Strategy can start
and end with any one of the aspects because it should be a dynamic process.

Requirement (b)(i)
Critical Success Factors (CSFs) are those components of strategy where the organisation
must excel to outperform competition (Johnson, Scholes and Whittington). It is implicit in the
definition that any organisation will not have a great number of CSFs: six or fewer CSFs have
been suggested as an appropriate number.
In the case of TDM, CSFs have to be identified which are specific to it and which are crucial
for its success. The following CSFs are recommended:
CSF: Customer satisfaction
This CSF could be supported by such KPIs as:
Student satisfaction: most UK universities now carry out such surveys into this area and TDM
could imitate this practice.
Rate of repeat business: many of TDMs students will be sponsored by their employers. This
KPI will measure if employers continue to use TDM.
CSF: Employee attitudes
This CSF could be supported by such KPIs as:
Rate of staff turnover: a high rate of staff turnover is suggestive of dissatisfaction, a low rate
of contentment.
Rate of staff absence: a high rate indicates poor staff morale; a low rate suggests staff that
are happy to come to work.
CSF: Product quality
This CSF could be supported by such KPIs as:
Market share: TDM has consistently had the largest market share in its sector and both its
absolute market share and trends in market share (Is it increasing? Is it decreasing?) are
strongly indicative of success.
Accreditations: TDMs courses are open to scrutiny by professional and academic bodies.
TDM could measure the accreditations it receives which reflect outside opinion as to the level
of quality it is achieving.
CSF: Brand image
This CSF could be supported by such KPIs as:
Brand recognition: this KPI could be assessed by means of survey with its customers, past,
present and potential. This KPI would indicate the proportion of customers who are aware of
TDMs brand.
Brand reputation: as in the case of brand recognition, brand repute could be investigated to
discover customers feelings about TDMs brand. It could be that recognition and repute are
contrary. It is possible for many people to know about your brand but not to like it.
Alternatively, few people may know about a brand but those that do like it very much.
Candidates who suggested market leadership as a CSF also earned marks

May 2010

Enterprise Strategy

Requirement (b)(ii)
Customer satisfaction
It is important that RCH knows how its customers feel about its services. As the CEO of
RCH commented ...success is built on happy customers: we give them what they want.
TDM has to ensure that it is getting this aspect right if it is to continue to be successful. It is a
truism that without customers TDM will not have a business. However, it appears to have had
a production focus rather than a customer focus and has neglected this area in the past. One
important indicator of customer satisfaction will be the students pass rates.
Employee attitudes
Employees are important in every business but this is particularly the case for TDM where its
employees come into contact with its customers. It is vital that TDMs employees continue to
perform at a high level and so TDM should monitor their morale and the KPIs above will give
an indication of this.
Product quality
Customers will only continue to use TDM s services if it can demonstrate it is providing
courses of a high quality. This can be measured, to an extent, by the endorsement of external
bodies in the form of accreditations. It can also be tracked more immediately by the market
share which TDM has gained. This KPI can be routinely calculated, perhaps at monthly
intervals, unlike accreditations which will be granted intermittently.
Brand image
TDM does not have a strong customer focus and it is in a market where there are continually
new entrants. Although it has had satisfactory performance in the past, it has constantly
achieved its sales targets and its students achieve passes on a par with the national average
it seems to be an introspective organisation. It may not be performing to the best of its ability.
In order to counteract these tendencies, TDM could benefit from an awareness of how it
appears to the outside world.
The answer in this section is not exhaustive, other CSFs and KPIs could be discussed.
However, candidates will always be given credit for appropriate contributions,

Enterprise Strategy

May 2010

Answer to Question Four


Requirement (a)
Ansoff has four cells in his matrix which is formulated with axes based on:

present and new products


present and new markets

The CEO has described XZYs strategy as being based on selling what we know to who we
know. Although this has been a successful strategy in the past in terms of profitability and
share price, XZY is now finding growth difficult to sustain.
This suggests that one of the cells of the matrix, Market Penetration, is approaching the
point where it cannot offer any further growth to XZY.
In the context of Ansoffs matrix the remaining options are:
Product development: this implies the launch of new products to existing markets. XZY
would need to analyse the cause of its reduced growth. If it is because its existing products
are coming to the end of their life-cycles, then launching new products in its existing markets
could be an appropriate way forward.
If the slow-down in growth is due to some structural problem with Asian markets, for example
recession, then offering new products to existing markets may not restore growth.
Market development: this option would mean that XZY would offer its existing products to
new markets, for example Australia and Europe. This would be appropriate if the products
were still vibrant and the reason for the slow-down in growth was that the Asian markets had
become saturated or were suffering from structural problems.
Diversification: according to Ansoffs matrix XZYs remaining option would be to diversify
which would commit XZY to making new products for new markets which could restore
growth; for example, XYZ could offer a business service within Europe.
Each of the options above implies moving into new areas, to a greater or lesser extent, and
so represents increased risk for XZY with diversification being the riskiest.
The CEO, who has a fiduciary duty to act in the best interest of XZYs shareholders, should
examine whether it is necessarily a bad thing if the companys growth rate slows down. It
could be better from the shareholders viewpoint than the endless pursuit of growth which, in
the long-term, is an unrealistic aspiration.

Requirement (b)
The CEO will have the following difficulties to deal with:

As the reorganisation is aimed at reducing headcount, staff will resist change either
informally by negotiation and lobbying or perhaps formally by recourse to legal action.

Many reorganisations do not fulfil their objectives and the new structure may damage
XZYs profit. This may occur as the workload may not reduce but will have to be
carried out by fewer staff and this could result in poorer quality. This could adversely
affect XZYs share price.

The reorganisation and its attendant difficulties may distract XZYs management from
its normal business and its customers might suffer as a result.

The reorganisation may not be tackling XZYs underlying problems, for example, that
its products are at the end of their life-cycles or that the Asian market has structural
problems. Thus, the CEO might be misled into putting his attention in the wrong
areas.

Although the reorganisation is designed to save money, in the short term it will cost
money and the financial benefits may take longer to emerge. There is a possibility
that the reorganisation might, in the short term, produce the opposite result to that
which is intended.

May 2010

10

Enterprise Strategy

Requirement (c)
A number of writers have suggested models or procedures to deal with change. One wellknown model was proposed by Kurt Lewin and this would be appropriate for XZY to use.
Lewin suggested that successful change could be achieved by the following three steps.

Unfreezing: at this stage the CEO and his team would need to make the organisation
aware of the need for change and its necessary preparations.

Change (Move): the organisation will have to understand its new structure and learn
to function. It will involve people in learning new ideas and approaches, particularly
about their own jobs. At this stage, XZY would be in a state of transition as it moves
towards its final desired, post-reorganisation form.

Freeze (Refreeze): when this stage is reached, the changes have to become
embedded in the organisation. All the staff remaining after the reorganisation and the
headcount reduction must understand their new role and put this into practice.
Therefore, it is at this point that the changes must be consolidated.

There are many other models and approaches to change that are available.
Candidates are given credit for any suitable model used appropriately.
Tactics
In addition to the use of a model to structure the reorganisation and headcount reduction, the
CEO needs to consider tactics that would contribute towards making this change successful.
It would be helpful if XZY had a person identified as being the champion of the change. This
needs to be an influential person and the most obvious person in this case would be the CEO
who would be able to demonstrate that there was top-level support for the change.
However, this role might be delegated to another Board member if the CEO has too many
calls on his time.
The change champion could be supported by a project team who would be involved in the
operational aspects of effecting the change.
The motivation of XZY employees could be influenced by providing incentives and
disincentives to participants in the change. As well as incentives, or inducements, people
could be encouraged/pressured to accept change if there are disincentives; for example, their
promotion could be blocked for those who resist change.
It would be important throughout the three stage process that XZY emphasised good
communications about the change with its staff. It would also assist motivation and
embedding of the change if staff were allowed to contribute to the change process and its
outcomes rather than simply being told what will happen to them.

Enterprise Strategy

11

May 2010

E3 Enterprise Strategy
Thursday 2 September 2010
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 begin using your computer to produce your
answer or use your calculator during the 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).
ALL answers must be submitted electronically, using the single Word and
Excel files provided. Answers written on the question paper and note paper
will not be submitted for marking.
You should show all workings as marks are available for the method you use.
The pre-seen case study material is included in this question paper on pages
2 to 6. The unseen case study material, specific to this examination, is
provided on pages 8 and 9.
Answer the compulsory question in Section A on page 11. This page is
detachable for ease of reference.
Answer TWO of the three questions in Section B on pages 13 to 17.
Maths Tables and formulae are provided on pages 19 and 20.
The list of verbs as published in the syllabus is given for reference on page
23.
Your computer will contain two blank files - a Word and an Excel file.
Please ensure that you check that the file names for these two documents
correspond with your candidate number.

E3 Enterprise Strategy

Enterprise Pillar

TURN OVER
The Chartered Institute of Management Accountants 2010

Aybe
Pre-seen Case Study
Background
Aybe, located in Country C, was formed by the merger of two companies in 2001. It is a listed
company which manufactures, markets and distributes a large range of components
throughout Europe and the United States of America. Aybe employs approximately 700
people at its three factories in Eastern Europe and supplies products to over 05 million
customers in 20 countries. Aybe holds stocks of about 100,000 different electronic
components.
Aybe is regarded within its industry as being a well-established business. Company Ay had
operated successfully for nearly 17 years before its merger with Company Be. Company Ay
can therefore trace its history back for 25 years which is a long time in the fast moving
electronic component business.
The company is organised into three divisions, the Domestic Electronic Components division
(DEC), the Industrial Electronic Components division (IEC) and the Specialist Components
division (SC). The Domestic and Industrial Electronic Components divisions supply standard
electronic components for domestic and industrial use whereas the Specialist Components
division supplies components which are often unique and made to specific customer
requirements. Each of the three divisions has its own factory in Country C.
Composition of the Board of Directors
The Board of Directors has three executive directors, the Company Secretary and five nonexecutive directors. The Chairman is one of the five independent non-executive directors. The
executive directors are the Chief Executive, Finance Director and Director of Operations.
There is also an Audit Committee, a Remuneration Committee and a Nominations
Committee. All three committees are made up entirely of the non-executive directors.
Organisational structure
Aybe is organised along traditional functional/unitary lines. The Board considers continuity to
be a very important value. The present structure was established by Company Ay in 1990 and
continued after the merger with Company Be. Many of Aybes competitors have carried out
structural reorganisations since then. In 2008, Aybe commissioned a review of its
organisational structure from a human resource consultancy. The consultants suggested
alternative structures which they thought Aybe could employ to its advantage. However,
Aybes Board felt that continuity was more important and no change to the organisational
structure took place.
Product and service delivery
Customers are increasingly seeking assistance from their component suppliers with the
design of their products and the associated manufacturing and assembly processes. Aybes
Board views this as a growth area. The Board has recognised that Aybe needs to develop
web-based services and tools which can be accessed by customers. The traditional method
of listing the companys range of components in a catalogue is becoming less effective
because customers are increasingly seeking specially designed custom made components as
the electronics industry becomes more sophisticated.

September 2010

Enterprise Strategy

Financial data
Aybes historical financial record, denominated in Cs currency of C$, over the last five years
is shown below.

Year ended 31 December:


2009
2008
2007
C$m
C$m
C$m
620
600
475
41
39
35
23
21
16

Revenue
Operating profit
Profit for the year

Earnings per share (C$)


Dividend per share (C$)

0128
0064

0117
0058

0089
0

2006
C$m
433
20
9

2005
C$m
360
13
5

0050
0

0028
0

Extracts from the 2009 financial statements are given at Appendix A. There are currently 180
million ordinary shares in issue with a nominal value of C$010 each. The share price at 31
December 2009 was C$064. No dividend was paid in the three years 2005 to 2007 due to
losses sustained in the first few years after the merger in 2001.
Aybes bank has imposed an overdraft limit of C$10 million and two covenants: (i) that its
interest cover must not fall below 5 and (ii) its ratio of non-current liabilities to equity must not
increase beyond 075:1. Aybes Finance Director is comfortable with this overdraft limit and
the two covenants.
The ordinary shareholding of Aybe is broken down as follows:

Institutional investors
Executive Directors and Company Secretary
Employees
Individual investors

Percentage of ordinary shares held at 31


December 2009
55
10
5
30

The Executive Directors, Company Secretary and other senior managers are entitled to take
part in an Executive Share Option Scheme offered by Aybe.
Performance Review
Aybes three divisions have been profitable throughout the last five years. The revenue and
operating profit of the three divisions of Aybe for 2009 were as follows:

Revenue
Operating profit

DEC Division
C$m
212
14

IEC Division
C$m
284
16

SC Division
C$m
124
11

Financial objectives of Aybe


The Board has generally taken a cautious approach to providing strategic direction for the
company. Most board members feel that this has been appropriate because the company
was unprofitable for the three year period after the merger and needed to be turned around.
Also, most board members think a cautious approach has been justified given the constrained
economic circumstances which have affected Aybes markets since 2008. While
shareholders have been disappointed with Aybes performance over the last five years, they
have remained loyal and supported the Board in its attempts to move the company into profit.
The institutional shareholders however are now looking for increased growth and profitability.
TURN OVER
Enterprise Strategy

September 2010

The Board has set the following financial objectives which it considers reflect the caution for
which Aybe is well known:
(i)
(ii)

Dividend payout to remain at 50% of profit for the year;


No further equity shares to be issued over the next five years in order to avoid
diluting earnings per share.

Capital budget overspends


Aybe has an internal audit department. The Chief Internal Auditor, who leads this department,
reports directly to the Finance Director. Investigation by the Internal Audit department has
revealed that managers with responsibility for capital expenditure have often paid little
attention to expenditure authorisation levels approved by the Board. They have justified
overspending on the grounds that the original budgets were inadequate and in order not to
jeopardise the capital projects, the overspends were necessary.
An example of this was the building of an extension to the main factory at the DEC division
that was completed in 2009 at a final cost of nearly C$3 million which was almost 50% over
budget. The capital budget for the extension was set at the outset and the capital investment
appraisal showed a positive net present value. It subsequently became apparent that the site
clearance costs and on-going construction expenditure were under-estimated. These
estimates were provided by a qualified quantity surveyor who was a contractor to Aybe. The
estimates supplied by the quantity surveyor were accurately included in Aybes capital
investment appraisal system which was performed on a spreadsheet. However, no regular
checks were carried out to compare the phased budgeted expenditure with actual costs
incurred. It came as a surprise to the Board when the Finance Director finally produced the
capital expenditure project report which showed the cost of the extension was nearly 50%
overspent.
Strategic development
Aybe applies a traditional rational model in carrying out its strategic planning process. This
encompasses an annual exercise to review the previous plan, creation of a revenue and
capital budget for the next five years and instruction to managers within Aybe to maintain their
expenditure within the budget limits approved by the Board.
Debates have taken place within the Board regarding the strategic direction in which Aybe
should move. Most board members are generally satisfied that Aybe has been turned around
over the last five years and were pleased that the company increased its profit in 2009 even
though the global economy slowed down. Aybe benefited from a number of long-term
contractual arrangements with customers throughout 2009 which were agreed in previous
years. However, many of these are not being renewed due to the current economic climate.
The Board stated in its annual report, published in March 2010, that the overall strategic aim
of the company is to:
Achieve growth and increase shareholder returns by continuing to produce and distribute
high quality electronic components and develop our international presence through expansion
into new overseas markets.
Aybes Chief Executive said in the annual report that the strategic aim is clear and
straightforward. He said Aybe will strive to maintain its share of the electronic development,
operational, maintenance and repair markets in which it is engaged. This is despite the global
economic difficulties which Aybe, along with its competitors, has faced since 2008. Aybe will
continue to apply the highest ethical standards in its business activities.

September 2010

Enterprise Strategy

In order to facilitate the achievement of the strategic aim, Aybes Board has established the
following strategic goals:
1.
2.
3.
4.

Enhance the provision of products and services which are demanded by customers;
Invest in engineering and web-based support for customers;
Maintain the search for environmentally friendly products;
Pursue options for expansion into new overseas markets.

The Board has also stated that Aybe is a responsible corporate organisation and recognises
the social and environmental effects of its operational activities.
Concern over the rate of growth
Aybes recently appointed Director of Operations and one of its Non-Executive Directors have
privately expressed their concern to the Chief Executive at what they perceive to be the very
slow growth of the company. While they accept that shareholder expectations should not be
raised too high, they feel that the Board is not providing sufficient impetus to move the
company forward. They fear that the results for 2010 will be worse than for 2009. They think
that Aybe should be much more ambitious and fear that the institutional shareholders in
particular, will not remain patient if Aybe does not create stronger earnings growth than has
previously been achieved.
Development approaches
The Board has discussed different ways of expanding overseas in order to meet the overall
strategic aim. It has, in the past, been reluctant to move from the current approach of
exporting components. However the Director of Operations has now begun preparing a plan
for the IEC division to open up a trading company in Asia. The DEC division is also
establishing a subsidiary in Africa.

TURN OVER
Enterprise Strategy

September 2010

APPENDIX A
Extracts of Aybes Income Statement and Statement of Financial Position
Income statement for the year ended 31 December 2009
2009
C$ million
620
(579)
( 4)
37
( 14)
23

Revenue
Operating costs
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Statement of financial position as at 31 December 2009

2009
C $million
ASSETS
Non-current assets

111

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets

40
81
3
124
235

EQUITY AND LIABILITIES


Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity

18
9
8
75
110

Non-current liabilities
Bank loan (8% interest, repayable 2015)

40

Current liabilities
Trade and other payables
Current tax payable
Bank overdraft
Total current liabilities
Total liabilities
Total equity and liabilities

73
8
4
85
125
235

End of Pre-seen Material


The unseen material begins on page 8

September 2010

Enterprise Strategy

This page is blank

Enterprise Strategy

September 2010

SECTION A 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER THIS QUESTION
Question One
Unseen material for Case Study
Aybes expansion into Asia
Prior to 2010, the IEC division of Aybe had carried out a limited amount of business in Asia.
Following Aybes decision to pursue business opportunities in Asia, it moved very quickly in
2010 and established a separate trading company with a local partner in Asia to sell the
products of the IEC division. The ownership of the company is shared; 50% by Aybe and 50%
with a local entrepreneur. Aybe has chosen this structure because of legal requirements. A
further legal requirement is that in the case of the company failing, dissolving or ceasing to
trade, Aybe will be required to reimburse the local entrepreneur the amount of his original
investment. Currently, this liability is estimated to be C$ 500,000.
Initially, this expansion was very successful with good levels of demand being experienced for
IECs products. Recently, however, a number of environmental factors have rapidly changed.
These include a forecast of declining demand for IECs products in Asia due to adverse world
economic factors and a move towards protectionism in some Asian countries. IEC has also
been unfortunate in that its direct labour costs in Asia have increased by more than the
planned level. Economic intelligence suggests that this inflation will continue increasing year
on year until the end of 2015.
Options for change
Aybe has always applied a rational planning model in carrying out its strategic planning
process. However, Aybe has decided to comprehensively review its overall strategic aim to
Achieve growth and increase shareholder returns by continuing to produce and distribute
high quality electronic components and develop our international presence, through
expansion into new overseas markets. The Director of Operations has been the champion of
IECs expansion into Asia and has been asked by the Board of Directors of Aybe to advise
whether Aybe should continue to develop IECs business in Asia or whether it should close its
separate trading company business and concentrate on its domestic market.
Director of Operations
The status of the Director of Operations and his career within Aybe are linked to the
expansion of the companys business into Asia. One of the reasons for his appointment to
Aybe is his Asian experience. He would like to become the Chief Executive of Aybe. At the
time of the decision to expand into Asia the Director of Operations was involved in a
professional dispute with Aybes Management Accountant who shortly afterwards left the
company. After a short period when Aybe had no Management Accountant it was realised
that this was a serious weakness and a replacement appointment was made.
The Director of Operations' advice
The Director of Operations has provided the table below relating to IECs three product
groups which constitute 95% of its Asian business. The remaining 5% of IECs Asian
business operates at break-even.
IEC division: forecast Asian business 2011
Product group
Average selling price per unit
Average variable cost per unit
Sales volume in units per year

September 2010

A
C$
350
200
2,800

B
C$
6,200
2,500
100

C
C$
85
60
58,000

Enterprise Strategy

The Director of Operations is under a lot of pressure not to disappoint the Board of Aybe and
has made a quick estimate of the profit which he considers will be about C$2 million in 2011.
The Director of Operations invited the Management Accountant to a meeting to discuss the
Boards request for advice regarding future business prospects in Asia. He suggested that to
save time the Management Accountant should present the Director of Operations' estimate to
the Board meeting which was shortly to discuss whether or not to continue with IEC's Asian
operation.
The Director of Operations explained that the business environment in Asia is very dynamic
which makes it difficult to predict too far ahead. In his previous company, the Director of
Operations had used scenario planning when faced with similar uncertain environments. The
Director of Operations acknowledged that there had been a number of changes in the
business environment affecting IEC. He had made some forward projections based on his
experience of Asia and his knowledge of Asian markets. He stated that although the Asian
expansion had not worked out exactly as planned, it still held very good potential for IEC, and
he was very committed to it. He also said that he realised that the Management Accountant
was new to the company.
However, the Board was pressing for early advice from the Director of Operations. The
Director of Operations referred to his table, (given above) and stated that it supported his
estimate that IECs Asian business would be able to achieve, at a minimum, C$2,000,000
profit per year. On this basis IECs Asian business would make a worthwhile contribution to
Aybes performance and should definitely be supported and continued.
The Management Accountant replied that he had consulted widely within Aybe about the
prospects for IECs business in Asia and the consensus was that the prospects were not
good. It was expected that revenue would decline after 2010 and operating costs would
increase. The Management Accountant has also established that there are specific fixed
costs of C$1 million per year associated with IECs Asian business. The Management
Accountant stated that before presenting anything to the Board he wanted to independently
calculate profitability based on the Director of Operations table and any other relevant
information. The Director of Operations said that this was unnecessary and would only waste
time. He also said that accuracy should be balanced against speed in order to allow Aybe to
take advantage of business opportunities in Asia.
The Management Accountant replied that he had to be given time to do his job and it was his
duty to form an independent opinion and to present it to the Board.
The Director of Operations said that the duty of a Management Accountant was to help
management not obstruct it. The Director of Operations said he knew far better than the
Management Accountant and the rest of Aybe about business in Asia and that the
Management Accountant should do as he is told when instructed by a Director of the Board.
The Director of Operations also added that if the Management Accountant wanted to keep
working in Aybe he should give the Director of Operations his support and not argue about
technicalities. He added The last time I had a fall-out with a Management Accountant she
was asked to leave Aybe: I hope you wont fall into the same trap.

The requirement for Question One is on page 11 which is


detachable for ease of reference

TURN OVER
Enterprise Strategy

September 2010

This page is blank

September 2010

10

Enterprise Strategy

Required
(a)
(i)

Discuss, in the context of its Asian business, whether it is appropriate for


Aybe to continue to use the traditional rational model for its strategic
planning.
(6 marks)

(ii)
Recommend, with reasons, two alternative approaches to strategy that
To an acceptable
level.
could
be appropriate for Aybe to use.
(6 marks)
(iii)

(b)

(c)

Advise Aybe of the factors it should consider before withdrawing from the
trading company which it has established with its partner in Asia.
(6 marks)
Advise the Board of Aybe:

(i)

How strategic management accounting could contribute to the success of its


current and future strategies.
(6 marks)

(ii)

How scenario planning could be used to help make the decision about
whether or not to withdraw from the trading company in Asia.
(6 marks)

Evaluate the Director of Operations claim that IECs Asian business will achieve,
at a minimum, C$2,000,000 profit in 2011.
(10 marks)
Note: There are 6 marks for calculation in requirement (c)

Situations such as the one encountered by Aybes Management Accountant are


described by CIMAs Code of Ethics as Threats (CIMA Code of Ethics 100.10). The Code
suggests a range of Safeguards that may eliminate or reduce Threats to an acceptable
level.

(d)

Explain the nature of the Threat faced by the Management Accountant.


Recommend, with reasons, two internal and two external Safeguards which could
eliminate or reduce the Threat.
(10 marks)
(Total marks for Question One = 50 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 13
TURN OVER
Enterprise Strategy

11

September 2010

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September 2010

12

Enterprise Strategy

SECTION B 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER TWO OF THE THREE QUESTIONS 25 MARKS EACH
Question Two
MNI is a university in a European country. It employs 350 academic staff and 420 other staff.
It has 8,000 full-time students. Following a visit from government appointed auditors it was
criticised for the following reasons:

The university operated at a deficit; its expenditure exceeded its income.

Student drop-out and failure rates were greatly in excess of the national average.

It could not accurately produce a head-count of the number of students enrolled.

Internal control of cash receipts was defective and in several areas there were
discrepancies.

The level of student complaints was very high and increasing.

It had a large number of debtors, mainly ex-students, and was not doing anything to
collect outstanding amounts.

It had an abnormally high level of staff turnover.

The quality of education provided by MNI had been given the lowest possible rating
Poor.

Following this visit, MNI replaced its Vice-Chancellor*. The majority of MNIs funding comes
from central government which has instructed the new Vice-Chancellor to prepare a new
Strategic Plan for the period 2011-2016. The new Strategic Plan will be required to address
the criticisms identified in the audits.
*The Vice-Chancellor is the University's Chief Executive Officer

Required

(a)

Categorise, under the headings, Operational, Management and Strategic, the


recent criticisms made about MNI. Advise the Vice-Chancellor how control
measures could assist in the successful implementation of the new strategic plan.
(7 marks)

(b)

Recommend, with reasons, what controls the university could use to assist in the
improvement of any three of the areas criticised in the recent audit.
(9 marks)

(c) Advise the Vice-Chancellor how information systems could support the successful
implementation of the new strategic plan.
(9 marks)
(Total for Question Two = 25 marks)

Section B continues on the next page


TURN OVER
Enterprise Strategy

13

September 2010

Question Three
WRL is a multi-national gold mining company. Its mission statement explains that WRL exists
to make the maximum possible profit for its shareholders whilst causing the least damage to
the environment. WRL will, at all times, be a good corporate citizen.
In 2007 WRL was granted a licence to mine for gold by the national government of Stravia, a
small country whose economy is mainly based on agriculture. The national government of
Stravia was very keen to develop its economy and saw gold mining as an important aspect of
this. The area where WRL was granted the licence is very remote and has no towns or cities
nearby. There are small villages near the site of the gold mine. One of the conditions of the
licence is that WRL would employ local people wherever possible, which it has done. WRL is
entitled under the terms of the licence to dispose of the waste from the gold mining wherever
is convenient for it.
The terms of the licence granted a payment by WRL to the national government of Stravia,
payable in US dollars, which in 2009 totalled $50 million. This is a significant amount of
foreign exchange for Stravias economy. Similar levels of payment by WRL to the national
government are likely to continue annually for the foreseeable future. The mine has operated
profitably since it began.
WRLs mine is in an area controlled by the Eastern state government. The Eastern state
government was not involved in the negotiations to bring WRL to Stravia and is not entitled to
any payment from WRL. However, Stravias national government granted the Eastern state
government $1 million in 2009 from the payments which it received from WRL.
The Eastern state government discovered that WRLs proposed mining techniques use a
great deal of water which becomes polluted. The cheapest way for WRL to dispose of this
polluted water is to dispose of it in a lake near the mine and it intends to do this.
The Eastern state government feared that if the polluted water was disposed of in the lake
this would kill all the aquatic life in the lake and have a long-lasting adverse effect on the lake
and the surrounding area. Therefore, the Eastern state government took legal action against
WRL in the Eastern state courts to prevent the disposal of the polluted water in the lake.
During the court action, WRL argued that if it was not allowed to dispose of the polluted water
in the lake its mining operations in Stravia would become uneconomic and the mine would
have to close. A small number of WRLs shareholders argued that it was better to close the
mine than to pollute the lake.
The state courts granted the Eastern state governments request to prevent WRL disposing of
the polluted water in the lake. However, upon appeal to the National Supreme Court, WRL
has been granted permission to pump the polluted water into the lake as its licence imposes
no restrictions.

The requirement for Question Three is on the opposite page

September 2010

14

Enterprise Strategy

Required

(a)
(i)

Categorise, according to Mendelows matrix, any three of the stakeholder


groups of WRL with respect to the decision about the disposal of the
polluted water. You should explain what the power and interests of the
three stakeholder groups you have categorised are likely to be.
Note: You are not required to draw the Mendelow matrix
(9 marks)

(ii)

(b)

Advise the Board of WRL of the actions it should take to resolve the
problem of its stakeholders competing objectives.
(7 marks)

Discuss the extent to which WRLs mission statement is consistent with its plan
to put the polluted water in the lake.
(9 marks)
(Total for Question Three = 25 marks)

Section B continues on the next page

TURN OVER

Enterprise Strategy

15

September 2010

Question Four
JALL is an independent retailer of office products selling 2,000 different items such as paper,
stationery, printer cartridges, diaries and planners. JALL has been established for over 50
years and has successfully served the needs of its customers in the small town where it
operates its three shops. The nearest competitor for JALL is ten miles away. JALL employs
50 staff and had revenue of 7,000,000 in the last financial year.
JALL has been owned by the same family since it began and many of its staff have worked in
the shops all their lives. Staff turnover has always been very low and staff morale very good.
JALLs managers know all their staff and major customers personally. JALLs managers are
prepared to listen to suggestions and complaints and they like to keep a finger on the pulse
of the business. Staff appraisals are conducted informally once a year when the profit-sharing
bonus is announced. JALL has paid its staff a bonus every year since it was established.
JALLs customers benefit from competitive prices and a very high standard of service. JALLs
suppliers are very pleased to work with JALL because its procurement procedures are very
efficient and it always pays its accounts within the credit period.
Recently there have been a number of changes at JALL. Customers have noticed signs in the
shop window stating Clearance sale: all items must go! Suppliers have noticed that they are
not always being paid on time. Within the shops, a manager is not always present and the
staff have been told that JALL is to be sold to LNR, a large national chain of stationery
retailers. When the staff enquired about the safety of their jobs they were told by their
manager that there will be a meeting, at a future date, when they would be told whether or not
they would be made redundant. However, the existing managers will keep their present jobs
under the new ownership.
The effects of these changes are:

Staff are very worried about their future with JALL and morale is at an all time low.

Suppliers are thinking about changing their credit terms with JALL and are
concerned about their future trading relationship.

Customers are unsure about the future of JALL and some have switched their
business to other retailers.

JALLs revenue has fallen considerably and there is little inventory on display within
the shops.

The requirement for Question Four is on the opposite page

September 2010

16

Enterprise Strategy

Required

(a)

Advise the management of JALL:


(i)

Why it might encounter resistance to the change in ownership.

(ii)

How it could overcome this resistance to change.

(6 marks)
(7 marks)

(b)

Advise the management of LNR:


(i)

How it could use the Balanced Scorecard to manage its strategic


performance.
(6 marks)

(ii)

How it could construct targets for JALL's staff within an incentive scheme and
use these targets to support the Balanced Scorecard.
(6 marks)
(Total for Question Four = 25 marks)

End of Question Paper


Maths Tables and Formulae are on Pages 19 and 20

Enterprise Strategy

17

September 2010

This page is blank

September 2010

18

Enterprise Strategy

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
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820

2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673

3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124

12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104

13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087

Enterprise Strategy

Interest rates (r)


4%
5%
0.962
0.952
0.925
0.907
0.889
0.864
0.855
0.823
0.822
0.784
0.790
0.746
0.760
0.711
0.731
0.677
0.703
0.645
0.676
0.614
0.650
0.585
0.625
0.557
0.601
0.530
0.577
0.505
0.555
0.481
0.534
0.458
0.513
0.436
0.494
0.416
0.475
0.396
0.456
0.377

6%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312

7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258

8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215

9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178

10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149

Interest rates (r)


14%
15%
16%
0.877
0.870
0.862
0.769
0.756
0.743
0.675
0.658
0.641
0.592
0.572
0.552
0.519
0.497
0.476
0.456
0.432
0.410
0.400
0.376
0.354
0.351
0.327
0.305
0.308
0.284
0.263
0.270
0.247
0.227
0.237
0.215
0.195
0.208
0.187
0.168
0.182
0.163
0.145
0.160
0.141
0.125
0.140
0.123
0.108
0.123
0.107
0.093
0.108
0.093
0.080
0.095
0.081
0.069
0.083
0.070
0.060
0.073
0.061
0.051

17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043

18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037

19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031

20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026

19

September 2010

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

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046

2%
0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.679
16.351

3%
0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.878

Interest rates (r)


4%
5%
6%
0.962
0.952
0.943
1.886
1.859
1.833
2.775
2.723
2.673
3.630
3.546
3.465
4.452
4.329
4.212
5.242
5.076
4.917
6.002
5.786
5.582
6.733
6.463
6.210
7.435
7.108
6.802
8.111
7.722
7.360
8.760
8.306
7.887
9.385
8.863
8.384
9.986
9.394
8.853
10.563 9.899
9.295
11.118 10.380 9.712
11.652 10.838 10.106
12.166 11.274 10.477
12.659 11.690 10.828
13.134 12.085 11.158
13.590 12.462 11.470

7%
0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594

8%
0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818

9%
0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129

10%
0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963

12%
0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469

13%
0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025

Interest rates (r)


14%
15%
16%
0.877
0.870
0.862
1.647
1.626
1.605
2.322
2.283
2.246
2.914
2.855
2.798
3.433
3.352
3.274
3.889
3.784
3.685
4.288
4.160
4.039
4.639
4.487
4.344
4.946
4.772
4.607
5.216
5.019
4.833
5.453
5.234
5.029
5.660
5.421
5.197
5.842
5.583
5.342
6.002
5.724
5.468
6.142
5.847
5.575
6.265
5.954
5.668
6.373
6.047
5.749
6.467
6.128
5.818
6.550
6.198
5.877
6.623
6.259
5.929

17%
0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628

18%
0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
7.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353

19%
0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101

20%
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
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:
1
1
1
n
r
[1 + r ]

PV =

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

PV =

1
r

September 2010

20

Enterprise Strategy

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Enterprise Strategy

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September 2010

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September 2010

22

Enterprise Strategy

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
Level 1 - KNOWLEDGE
What you are expected to know.

Level 2 - COMPREHENSION
What you are expected to understand.

VERBS USED

DEFINITION

List
State
Define

Make a list of
Express, fully or clearly, the details/facts of
Give the exact meaning of

Describe
Distinguish
Explain

Communicate the key features


Highlight the differences between
Make clear or intelligible/State the meaning or
purpose of
Recognise, establish or select after
consideration
Use an example to describe or explain
something

Identify
Illustrate
Level 3 - APPLICATION
How you are expected to apply your knowledge.

Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate

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

Level 5 - EVALUATION
How are you expected to use your learning to
evaluate, make decisions or recommendations.

Enterprise Strategy

Analyse
Categorise
Compare and contrast

Put to practical use


Ascertain or reckon mathematically
Prove with certainty or to exhibit by
practical means
Make or get ready for use
Make or prove consistent/compatible
Find an answer to
Arrange in a table

Construct
Discuss
Interpret
Prioritise
Produce

Examine in detail the structure of


Place into a defined class or division
Show the similarities and/or differences
between
Build up or compile
Examine in detail by argument
Translate into intelligible or familiar terms
Place in order of priority or sequence for action
Create or bring into existence

Advise
Evaluate
Recommend

Counsel, inform or notify


Appraise or assess the value of
Advise on a course of action

23

September 2010

Enterprise Pillar

Strategic Level Paper

E3 Enterprise Strategy

September 2010

September 2010

24

Enterprise Strategy

The Examiner's Answers September 2010


E3 - Enterprise Strategy
SECTION A
Answer to Question One
Requirement (a)(i)

Aybe applies a traditional rational model (TRM) in carrying out its strategic planning
process.

Aybe believes the value of continuity to be very important.

In the annual report of March 2010 it was stated that the overall aim of Aybe was to
Achieve growth and increase shareholder returns by continuing to produce and
distribute high quality electronic components and develop our international presence,
through expansion into new overseas markets.

Aybe has decided to comprehensively review its overall strategic aim and is thinking
about closing its Asian business and concentrating on the domestic market.

These statements are, to a degree, contradictory because Aybe believes continuity to be


very important, yet six months after it stated an overall aim of expansion into new overseas
markets it is now considering withdrawing from these. Such an early revision to the overall
aim suggests that the planning mechanism employed by Aybe is open to question.
Additionally, Aybe has had to contend with some environmental factors: declining demand,
protectionism and increased labour costs which have moved rapidly to Aybes disadvantage.
There is tension between these environmental factors and how Aybe can respond to them
within the context of TRM, as the TRM is best suited to an environment where there is a high
degree of stability and predictability. Aybes experience in Asia since IEC expanded there
suggests that the Asian environment is unpredictable and that key factors are likely to change
rapidly. This implies that the Asian business environment that Aybe has encountered is not
one where the TRM is likely to be a suitable approach for constructing strategy.
Requirement (a)(ii)
A number of approaches to the formation of strategy have developed and three are described
below:
Emergent: this approach, after Mintzberg, regards strategy not as a mechanistic process but
as a living one. It does not advocate a top-down procedure for the development of strategy
unlike the Traditional Rational Model. Emergent strategy develops in response to
environmental conditions and is highly adaptive. This could suit Aybe as it moves into an
unfamiliar environment and contemplates withdrawal from Asia.
Incrementalism or logical incrementalism: this is another adaptive approach to strategy
which involves making small changes to strategy in the light of changing conditions. It is a

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September 2010

conservative rather than a radical approach and can be characterised as Evolution not
Revolution. This approach could be suitable for Aybe as an initial first move away from the
constraints of strategic planning.
Opportunism or freewheeling opportunism: this approach is the opposite to that of TRM.
Opportunism does not advocate the preparation of plans; instead it advocates taking
advantage of opportunities as they arise. This approach mirrors that of the Director of
Operations and could be suitable in an environment subject to considerable, frequent and
unforeseeable changes. It has the disadvantage that an organisation which unthinkingly
pursued opportunism could lack strategic coherence.
Three approaches are discussed above for the sake of completeness but candidates were
only required to discuss two.
Requirement (a)(iii)
Aybe is considering withdrawing from the trading company which it has established with a
local partner and no longer selling its products in Asia. Alternatively, it could close the trading
company but still sell its products in Asia through another means of distribution, for example,
through agents.
As regards the trading company, Aybe shares control of this as it only has 50% of the
ownership. Therefore, Aybe cannot close the company without the agreement of the local
entrepreneur who also owns 50% of the company. If the company ceases to trade, Aybe will
be liable to pay the local entrepreneur C$500,000. Aybe will need to enter into negotiations
with the local entrepreneur regarding the closure of the trading company. It may be that there
is a purpose in the trading company continuing in existence in which case Aybe could offer to
sell its shares in the trading company to the entrepreneur. This may be particularly
appropriate if Aybe merely wants to withdraw from a direct presence in Asia but would still like
to sell its products there.
Aybe will also need to consider if there will be any ill effects on its reputation if it withdraws
partially or completely from Asia. It should also evaluate the effects that withdrawal will have
on its various stakeholders.

Requirement (b)(i)
Strategic management accounting has been defined by CIMA as a form of management
accounting in which emphasis is placed upon information which relates to factors external to
the entity, as well as non-financial information and internally generated information. (CIMA
Official Terminology). Strategy has been characterised as the means by which the
organisation interfaces with its external environment so the requirement for an information
system with an external focus is apparent.
Strategic Management Accounting could contribute to the success of current strategies by
monitoring results. Examples of this would be tracking relative market shares and
competitors costs. It is not sufficient to track Aybes sales in isolation. These could be
increasing but are they increasing in line with the increase in the market? There is a need to
compare Aybes results against those of its competitors: relative market share will do this.
Similarly, it is not sufficient for Aybe to understand its own cost structure. If it wants to be
competitive it must understand its competitors cost structures. Similarly, Strategic
Management Accounting could contribute to the success of future strategies in forecasting
relative market shares and forecasting competitors costs.
The important quality about Strategic Management Accounting in all circumstances is its
external orientation; it looks outwards. This orientation means that an organisation using
Strategic Management Accounting should avoid being introspective and should pay due
attention to such factors as its markets, its customers and its competitors. This external
orientation would be very beneficial for Aybe in respect of its impending decision about IECs
business in Asia. Asia is a new market for Aybe so it is important that it treats it distinctly from
the markets where it has more experience; Europe and the United States of America.
It would be wrong for Aybe to assume that doing business in Asia represents an extension of
its current activities. Asias markets, customers and competitors should all be assessed on

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Enterprise Strategy

their own characteristics and Strategic Management Accounting could usefully contribute to
these assessments.
Requirement (b)(ii)
Scenario planning
Scenario planning has been described as the building of plausible views about how the
business environment of an organisation might develop in the future and is based on sets of
key drivers for change about which there is a high level of uncertainty. The construction of the
scenarios will involve a multi-disciplinary team and external consultants can also be used.
Schoemaker (1997) describes a four step approach for using scenarios:

Develop scenarios to examine the external environment and identify key trends and
uncertainties.

Conduct industry analysis and strategic formulation against each scenario to develop
strategies that enable the organisation to fit with each scenario.

Identify the core capabilities of the business and strengthen these to withstand or
benefit from each of the scenarios.

Adopt the appropriate strategic option as the future unfolds and the key uncertainties
resolve themselves.

Aybe is considering a decision about the future of its expansion strategy in Asia and has
already found that some key environmental factors have changed. This suggests that making
plans on the basis of a single forecast is likely to be misleading. If Aybe was to use scenario
planning it would force it to identify what it considered to be the key drivers for change which
could include, for example, the duration of the world recession and the growth in gross
domestic product in Asian countries. Drawing upon the expertise of its multi-disciplinary team,
Aybe would construct plausible views or scenarios about how the environment will develop
and it could apply Schoemakers model as above.
Alternatively, particularly if Aybe has constructed a number of plausible views, it has a
number of different actions it could take. Aybe could:
1.

Invest to a limited extent in each of the scenarios and increase its investment when
the correct scenario emerges.

2.

Aybe could wait and see what happens but prepare for a quick response when there
is more clarity about the future.

3.

Avoid long-term investments based on future events but concentrate on developing


core competences to help it succeed in any environment.

4.

Aybe could concentrate on its current business and hope the future does not happen.

Summary
Scenario planning would help Aybe make its decision about the future of its Asian business
by:

Using a multi-disciplinary team and outside consultants if necessary.


Forcing Aybe to identify the key drivers for change for its Asian business.
Constructing a number of plausible views/scenarios which suggest how the business
environment of Aybe would appear in the future.
Giving Aybe a number of options to adopt in respect of the different scenarios which it
has constructed.

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September 2010

Requirement (c)
The Director of Operations has provided the following forecast:
Forecast Asian business 2011
Product group
Average selling price per unit
Average variable cost per unit
Sales volume in units per year

A
C$
350
200
2,800

B
C$
6,200
2,500
100

C
C$
85
60
58,000

This forecast can be resolved into the following profit forecast for the Asian business 2011:
Product group
Average selling price
Variable cost per unit
Unit contribution margin
Sales volume per year
Aggregate contribution margin
Fixed costs per year
Profit per year

A
C$
350
200
150
2,800
420,000

B
C$
6,200
2,500
3,700
100
370,000

C
C$
85
60
25
58,000
1,450,000

Total
C$

2,240,000
1,000,000
1,240,000

The forecast profit, based on the information supplied by the Director of Operations, is
C$1,240,000 which falls short of the Director of Operations estimate that IECs Asian
business will achieve at a minimum, C$2,000,000 profit in 2011. A reasonable inference is
that the Director of Operations did not account for the fixed costs of C$ 1,000,000 per year.
This may have been due to the pressure he was under. As the trading company carrying out
this business is jointly owned with a local partner, it is reasonable to assume that not all of the
profit would be Aybe's.
The forecast profit may require further qualification as Aybe is faced with a forecast of
declining demand so the levels forecast for the three product groups may not be attainable.
However, it could be that the Director of Operations has reflected the decline in demand in his
forecast. This point requires clarification.
Another possible qualification concerns the forecast inflation in direct labour costs. Clarification
would be needed from the Director of Operations as to whether or not this inflation is reflected in
his forecast. It is the case that the forecast profit of C$1,240,000 may represent the best case
but this could be over-optimistic.
Conclusion
The Director of Operations estimate that the Asian business will achieve, at a minimum,
C$2,000,000 profit in 2011 significantly overstates the likely profit.

Requirement (d)
CIMAs Code of Ethics gives examples of a number of categories of Threats. Aybes
management accountant has been told by the Director of Operations:

... he should help management not obstruct it. This is a reasonable expectation.

the Management Accountant should do as he is told when instructed by a Director of


the Board. This is true within reasonable boundaries.

The Management Accountant has asked for time to do his job and to be allowed to
present his opinion to the Board. The Director of Operations said that if the
Management Accountant 'wanted to keep working in Aybe plc he should give the
Director his support and not quibble about technicalities.

The Director of Operations added The last time I had a fall-out with a Management
Accountant she was asked to leave Aybe: I hope you wont fall into the same trap.
With this last comment, the Director of Operations has moved into an area defined by CIMA
as Intimidation:

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Intimidation threats. These may occur when a professional accountant may be deterred from
acting objectively by threats, actual or perceived.
The Code gives many examples of internal safeguards: that is, ones within the work
environment.
For completeness, all of these are given although candidates were only required to give two
internal safeguards.
All of the following examples are given equal weight in the marking process.

The employing organisations system of corporate oversight or other oversight


structures.

The employing organisations ethics and conduct programmes.

Recruitment procedures in the employing organisation emphasising the importance


of employing high calibre competent staff.

Strong internal controls.

Appropriate disciplinary processes.

Leadership that stresses the importance of ethical behaviours.

Policies and procedures to implement and monitor the quality of employee


performance.

Timely communication of the employing organisations policies and procedures.

Policies and procedures to empower and encourage employees to communicate to


senior levels within the employing organisation any ethical issues that concern
them without fear of retribution.

Consultation with another appropriate professional accountant.

The Code points out that its list of Safeguards is not necessarily exhaustive.
The Code gives many examples of external safeguards.
For completeness, all of these are given although candidates were only required to give two
external safeguards.
Examples of external safeguards given in the Code include:

Educational, training and experience requirements for entry into the profession.

Continuing professional development requirements

Corporate governance regulations.

Professional standards.

Professional or regulatory monitoring and disciplinary procedures.

External review by a legally empowered third party of the reports, returns,


communications or information produced by a professional accountant.

All of the above examples are given equal weighting in the marking process.

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SECTION B
Answer to Question Two
Requirement (a)
MNI has been subjected to eight different criticisms. These can be categorised as:
Operational

It could not accurately produce a head-count of the number of students on roll.


The internal control of cash receipts was defective and in several areas there had
been discrepancies.

Management

Its expenditure exceeded its income.


Student drop-out and failure rates were greatly in excess of the national average.
The level of student complaints was very high and increasing.
It had a large amount of debtors, mainly ex-students, and was not doing anything to
collect outstanding amounts.
It had an abnormally high level of staff turnover.

Strategic

The audit of the quality of education provided by MNI awarded MNI the lowest rating
of Poor.

Teaching note: These categories are indicative rather than definitive as some criticisms could
fit more than one category, for example, a high level of staff turnover can be viewed as both
an Operational and a Management criticism. Candidates were not expected to rigidly adhere
to these categories; other sensible categories gained marks.
The Vice-Chancellor has been instructed to prepare a new strategic plan for the period 20112016. The new strategic plan has to address the eight criticisms and it is reasonable to
assume that the Vice-Chancellor wishes to eradicate the eight criticisms. The role of the
control measures will be to monitor performance in these eight areas and provide feedback
and feed-forward information to enable managers to take appropriate action.
In general, the control measures should be designed to align performance with the strategic
goals, values and vision articulated within the new strategic plan. The control measures are
likely to take the form of Critical Success Factors (CSFs) which could be supported by Key
Performance Indicators (KPIs). The reporting of performance against these control measures
should be incorporated within the periodic management control reporting and could also be
reported within a Balanced Scorecard framework.
Requirement (b)
Teaching note: For completeness, all the eight criticisms are dealt with. In some cases, more
than one measure is proposed. Candidates were given credit for good answers even if their
suggestion did not appear below.
Operational
The operational areas which were criticised are most amenable to direct action and should be
the quickest to rectify. These represent areas of the universitys work which is going wrong on
a daily basis and so immediate action is required.
Inaccurate head-count of the number of students on roll.
If the university does not know how many students it has, this will have adverse implications
for many aspects of the universitys work ranging from time-tabling to funding.
Control action: the university should issue an identity card for each student and each student
should be registered on a central database which is continually up-dated. If students are not

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in possession of a valid identity card they would be prevented from using university services,
such as the library or the computer network.
Internal control of cash receipts was defective and in several areas there had been
discrepancies.
The university will have a large number of cash transactions every day, for example in its
restaurants, libraries and sports centres. If cash control is inadequate there is a danger of
theft.
Control action: as far as possible restrict the use of cash for university transactions. Limit the
amount of cash balances held within the university. Insist all cash over a sensible working
balance is banked daily or more frequently if necessary. Separate duties, wherever possible,
of staff handling cash and those responsible for accounting for cash.
Management
Management problems are more complex and not as amenable to quick solutions as are the
operational ones.
MNIs expenditure exceeded its income.
This is not sustainable in the long-run because there is a danger that the university could
become insolvent. Although the actions taken to address the operational criticisms will help,
they will not be sufficient to align the universitys income and expenditure. Other actions,
which will take longer to implement, are required.
Control action: review all areas of expenditure, institute a cost reduction programme,
consider increasing prices wherever possible and reduce investment in working capital.
Student drop-out and failure rates were greatly in excess of the national average.
Student drop-outs and inflated failure rates indicate dissatisfaction with the university which
will damage the universitys reputation. They also point to inefficiencies in the teaching and
learning process and will damage the universitys cash flow.
Control action: conduct exit interviews with students who are leaving the university, review
recruitment procedures and requirements, institute an academic audit of university
programmes.
MNIs level of student complaints was very high and increasing.
Similarly, to the student drop-out and failure rates, this indicates dissatisfaction with the
universitys processes.
Control action: review the complaints procedures and address any systematic cause of
complaints, for example, examination regulations. Survey the current students to identify
areas of potential complaint.
MNI had a large amount of debtors, mainly ex-students, and was not doing anything to collect
outstanding amounts.
This criticism may be related to the university not accurately knowing how many students it
has on roll. Once a student has left the university it will become more difficult to collect
outstanding amounts. These debtors represent a loss to the universitys cash-flow.
Control actions: establish a target level of debtors and institute actions to reduce the
outstanding level of debtors.
MNI had an abnormally high level of staff turnover.
Staff are a vital part of every organisation because they deliver the strategy. An abnormally
high level of staff turnover indicates problems within the organisation. Staff turnover creates
expense for the university and whilst it is normal for some staff to leave the university the
abnormally high level will create an abnormally high expense and may impact on MNI's level
of quality.
Control action: conduct exit interviews with all staff that leave the university. Survey the
existing staff and rectify any general causes of dissatisfaction.

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Strategic
At this level, the criticisms represent the most complex problems faced by the university.
They cannot be resolved by single actions but will require holistic solutions.
MNI had received the lowest possible rating for the quality of its education: Poor.
This rating represents a public criticism of the university which is likely to affect its reputation.
Externally, this could result in worsening recruitment of students. Internally, this implies that
the universitys current students are receiving a sub-standard education. If this rating is not
improved the universitys new strategic plan will be undermined.
Control action: establish a department responsible for quality. Codify existing quality
procedures and produce new ones as necessary. Carry out periodic internal quality audits.
Allocate investment in the new strategic plan to address areas of quality weakness. Make
quality targets a part of all members of staffs performance management objectives.

Requirement (c)
The university's information systems could support the successful implementation of the new
strategic plan at a number of levels. Robert Anthony produced a hierarchy of control which
was founded on a base of transactions processing. Above this was the level of operational
control, above that management control and, at the highest level, strategic planning. This
model has obvious applicability to MNI and each level identified by Anthony will require
support from university information systems.
Strategic
The new strategic plan should identify Critical Success Factors which are those aspects of
the university's operations that the plan has identified as being vital for its success: an
example of a CSF would be that the university should operate at a surplus. It was criticised for
being in deficit: its expenditure exceeding its income. This CSF could be monitored by means
of a Key Performance Indicator, which in this case would be the university's operating position
which could be reported upon monthly. The monthly reporting would entail use of an
information system.
Teaching note: Additionally, information systems have, in themselves, been identified as an
important strategic variable. This is for a number of reasons, the first being that information
systems, together with their associated hardware infrastructure, are likely to be a significant
proportion of the university's operating and capital costs. The information systems can also be
an important competitive variable in that they can affect the way in which the university carries
out its business: an example of this would be the university replacing lectures by webcasts.
Thus, the information systems and the new opportunities they offer could be a source of
competitive advantage. For these reasons the new strategic plan should incorporate within it
an information strategy.
Management
The universitys information systems should support the management of MNI by providing
reporting and monitoring functions to demonstrate performance against the targets and KPIs
identified in the new strategic plan. An example of this would be periodic reporting of the
universitys income and expenditure. Student drop-out and failure rates could also be reported
periodically to managers with responsibility for these areas. The university would also need to
know periodically the number of its debtors to check that its corrective actions were
succeeding.
Operational
The universitys information systems should provide real-time information about key
operational performance. It is important that the university should accurately know, at any
time, how many students it has on roll and it should continually and accurately be able to
account for its cash. This implies a need for immediate data capture which would be
facilitated by devices such as the student identity card.

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Answer to Question Three

Requirement (a)(i)
WRLs stakeholders may be categorised as follows:
Internal:
Board of WRL
Employees working in Eastern mine
Connected
Shareholders in general
Minority of shareholders interested in decision
External
Eastern state government
Stravia national government
Using Mendelows stakeholder mapping approach:
Level of interest low: Level of power low
Shareholders in general
This is just one decision made by a multi-national company. Many shareholders would
probably not even be aware of the decision and so their interest will be low. Shareholders
acting together have great power but they rarely act together and so have been categorised
as having low power for this decision.
Level of interest low: Level of power high
None
Level of interest high: Level of power low
Employees working in Eastern mine
The employees are dependent and there may not be alternative employment available for
them so their interest in the decision is high. However, a group of indigenous people living in
a remote part of a small country are likely only to have low power in respect of this decision.
Minority of shareholders interested in decision
These stakeholders have a high level of interest in the decision but little power to affect it as
they are small in numbers.
Eastern state government
The state government has a high level of interest which is why it opposed WRL in the courts.
However, it has been over-ruled by the National Supreme Court and so its power has been
revealed as being low.
Level of interest high: Level of power high
Board of WRL
The board has a high level of interest in this decision because it is crucial for the continuance
of its mining operations in Stravia. It is its decision whether or not to put its polluted water in
the lake so its power is high.
Stravia national government
The national government has a high level of interest in this decision as it wishes to develop
the economy and it has received $50 million of royalty payments. These would cease if the
mine closes. As it granted the licence to mine and could oppose WRLs continued operations
in its country its power is high.

Requirement (a)(ii)
In the answer above, stakeholders were identified using Mendelows classifications; the
following advice is based on Mendelows prescriptions:
Level of interest low: Level of power low
Shareholders in general
Proposal: Minimal effort

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Level of interest high: Level of power low


Employees working in Eastern mine
Minority of shareholders interested in decision
Eastern state government
Proposal: keep informed
Level of interest high: Level of power high
Board of WRL
Stravia national government
Proposal: because of its high levels of power and interest WRL must ensure that any strategy
it pursues is acceptable to these Key Players.
Other approaches which have been suggested to resolve stakeholders competing objectives
include:
Prioritisation: the Board could specify that any decision must, as a minimum, satisfy one or
more specific objectives before it can be considered. In this case, this could mean that, at a
minimum, the mining in Stravia must be profitable: once this criterion is satisfied then WRL
could seek to achieve profitability in a socially responsible way.
Weighting and scoring: each stakeholder view is given a weight which reflects its relative
importance to WRL with higher weights meaning higher importance. Each option is scored
according to how well it achieves corporate objectives. A weighted score is calculated for
each objective and the strategic option with the highest score is pursued.
Additionally, Cyert and March (1963) have proposed some other approaches:
Satisficing: the decision would be made to keep all, or at least the most powerful,
stakeholders happy.
Sequential attention: stakeholders are kept happy by taking turns to have their objectives
realised.
Side payments: where a particular stakeholders objective cannot be addressed, they are
compensated in another way.
Exercise of power: if management is deadlocked because of competing stakeholder
objectives, this could be resolved by one or more powerful figures using their power to force
through their preferred option.

Requirement (b)
WRLs mission statement declares that: WRL exists to make the maximum possible profit for
its shareholders whilst causing the least damage to the environment. WRL will, at all times, be
a good corporate citizen. If there is a conflict, this is because there are arguments both in
favour and against putting the polluted water in the lake. These are summarised below:
Arguments in favour of putting the polluted water into the lake.

WRLs mine in Stravia has been operating at a profit. This is consistent with the
mission statement and is to the benefit of the majority of its shareholders.

WRL has employed local people, generated a substantial amount of foreign


exchange for the national government of Stravia and has assisted in the development
of the economy. WRL has been a good corporate citizen.

The cheapest way of disposing of the polluted water is to dispose of it in the lake. If
WRL does not put its polluted water in the lake, the mine would become uneconomic
and would have to close to the detriment of some of its stakeholders.

The National Supreme Court has upheld WRLs right to dispose of its polluted water
in the lake. Therefore, WRL would be acting lawfully according to its licence in putting
its polluted water in the lake.

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Enterprise Strategy

Arguments against putting the polluted water into the lake.

A minority of WRLs shareholders are opposed to the plan, so if WRL goes ahead it
will not be acting in these shareholders interests.

If WRL puts its polluted water in the lake it will kill all the Aquatic life. This is not the
behaviour of a good corporate citizen.

The decision about the disposal of the polluted water was disputed by Eastern, the
state government. If WRL proceeds with its plan, it will be against the wishes of the
state government.

Conclusion
When the arguments for the disposal of the polluted water are taken into account WRL can be
viewed as acting in accordance with its mission statement. However, when the arguments
against the plan are considered, WRL can be judged to be acting contrary to its mission
statement. There is no clear conclusion as to whether or not WRL will be acting in accordance
with its mission statement if it puts its polluted water in the lake. It can also be reasonably
asserted that if the polluted water is not put in the lake it will also be uncertain whether or not
the mission statement is being complied with.

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September 2010

Answer to Question Four


Requirement (a)(i)
A number of reasons for people resisting change have been identified by researchers. One
source of resistance could be that JALL did not properly prepare for the change in ownership.
If the staff of JALL do not understand the reasons for the change in ownership and these
have not been explained to them it is likely that they will resist the change. The idea of
resistance to change is central to the approach of Lewin to change management and his idea
of Forcefield Analysis.
Senior identified the following main sources of individual resistance:
Fear of the unknown
There has not been a definitive announcement about the change of ownership of JALL nor
the reasons for it. Some of JALLs stakeholders, its staff, customers and suppliers may suffer
from fear of the unknown which could lead them to resist the change. In the case of the
suppliers and customers this could lead them to take their business elsewhere.
Dislike of uncertainty
To the extent that JALLs stakeholders dislike uncertainty; they are likely to resist the change.
Potential loss of power
The staff are most likely to be faced with a loss of power in that they may lose their jobs as a
result of the changes. The suppliers and customers have more autonomy as there are other
retailers of office products.
Potential loss of rewards
For the staff, this factor is similar to the potential loss of power.
Potential lack of or loss of skills.
This is most likely to affect the staff and the suppliers. If the new owners of JALL intend to
carry out the business differently to how JALL did business in the past, this may require new
skills. For example, under its new owners, JALL may carry out its business using the Internet
and this would require IT skills from both JALLs staff and suppliers which they may not
possess. This could inspire resistance to the change from both the staff and suppliers: in the
case of the suppliers they may choose not to do business with JALL in the future.
An alternative grouping suggests that the main reasons for people resisting change are:
An incomplete understanding of the nature of the change and/or the reasons for it:
JALLs staff have not been informed about the reasons for the change.
Individuals believing that the results of the change could threaten their own personal
interests and ambitions:
JALLs staff do not know if their jobs are safe.
Differing assessments of the costs and benefits of the change to the organisation:
It is difficult for JALLs stakeholders, its staff, customers and suppliers, to make any
assessment about the costs and benefits of the change as they lack information about it.
Lack of trust in those initiating the change and their motives:
It is not clear who has initiated the change so it would be difficult for the stakeholders to invest
trust.

Requirement (a)(ii)
The notion of resistance to change is embedded within Lewins Forcefield analysis. Within this
context, resistance could be overcome by strengthening the driving forces, such as increasing
management pressure or by weakening the forces that restrict output, such as adopting a
more humane style of management. It would also be feasible to pursue both strategies
simultaneously.

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Enterprise Strategy

Kotter and Schlesinger (1979) identified the following ways to reduce resistance to change
which occupy a continuum ranging from the persuasive to the highly authoritarian:

Education and communication


If the resistance has been caused by a lack of understanding of the reasons for the
changes, JALL could communicate the reasons for the change of ownership to its
stakeholders.

Participation and involvement


This approach could gain the co-operation of staff involved in the change. However,
not everyone wants to be participative. JALL could offer its stakeholders the
opportunity to influence the change, for example, its staff could suggest a timetable
for integrating JALL into the national chain.

Facilitation and support


JALL could offer training and counselling to support its staff in their new roles. JALL
could also prepare staff for their life outside the organisation if they are to be made
redundant, by providing help with CV preparation, job searching and tax advice if
redundancy pay is to be offered.

Negotiation and agreement


This is an alternative to imposing change upon a workforce. If JALL's workforce is
given the opportunity to express its concerns and this is met by a genuine response
to resolve these by management, it is likely that resistance will be reduced. JALL
could assist this process on an ad hoc basis. Alternatively, JALL could use the
services of a third party, for example, a trade union or a mediator to help it manage
the process.

Manipulation and 'co-optation'


This is an ethically questionable approach as resistance is reduced by means such
as presenting misleading or incomplete information. It is likely that such an approach
would infringe CIMA's Code of Ethics and, therefore, could not be recommended.
Some of the people resisting the change could be persuaded to support it by being
offered inducements such as promotion.

Explicit and implicit coercion


This last approach is the most brutal as it involves actual or implied threats: for
example, the management might threaten to close part of its business and to sack
employees if the proposed changes are resisted. Many enlightened managers would
not employ this approach or only use it as a last resort

Requirement (b)(i)
The new management of JALL also has to ensure its continued success within the national
chain. As success for any organisation is a multi-dimensional concept, JALLs performance
needs to be measured by a multi-dimensional model and the Balanced Scorecard enables
this.
Central to the Balanced Scorecard is the organisations vision and strategy and this would
probably be formulated for JALL by its new owners. Allied to the vision and strategy are four
perspectives designed to support the organisations vision and strategy. The perspectives
are:

Financial
Customer
Learning and growth
Internal business

All of the four perspectives could include both qualitative and quantitative measures which
could be reported upon periodically. The measures chosen for the reporting would be those
most crucial for the delivery of JALLs vision and strategy. These should be reviewed regularly
and other ones substituted if they have more relevance.
The Balanced Scorecard would, therefore, become a part of JALLs normal periodic reporting
system. A summative integrated report reflecting the performance of JALL regarding all four

Enterprise Strategy

13

September 2010

of the Balanced Scorecards perspectives could be prepared and this would give senior
management the opportunity of tracking the achievement of JALL against the overall vision
and strategy.
More detailed reports on each of the four perspectives should be prepared for operational
managers so they would be made aware of the degree to which the area for which they are
responsible is contributing to overall success.

Requirement (b)(ii)
Within the Balanced Scorecard a variety of control measures can be identified. If JALL is
operating a participative management culture, these measures and targets would be the
result of discussion and negotiation with those staff that are being held responsible for JALLs
performance. If the culture is top-down (autocratic) the measures and targets would be
imposed upon those who are held responsible for their achievement.
Whatever the process by which the targets have been established, these could then be
integrated into a reward system for staff. This could be done by means of performance related
pay. A manager could agree (in a participative organisation) or be told (in an autocratic one)
targets or objectives for a future period. If the manager achieves these objectives he/she
would be rewarded. Usually this would be with extra pay but the reward can take other forms:
for example, promotion and fringe benefits.
Similarly, staff could be given (autocratic) or agree (participative) targets for the future which,
if met, would help JALL achieve its vision and strategy. Performance against these targets
could be rewarded in a way similar to those for the managers.
The important link with the Balanced Scorecard is that the managers objectives should reflect
the control measures that have been identified within the Balanced Scorecard to help achieve
the organisation's vision and strategy. An example of how an individual manager and her/his
performance related pay is integrated with the Balanced Scorecard is shown below:
Vision and Strategy: To be the region's leading retailer of office products
Customer perspective: Capture new markets
Marketing manager: Personal objective
Carry out market research to identify new market segments capable of delivering 300,000
additional sales per year.
Adapted from CIMA Learning System, 2009, page 447

September 2010

14

Enterprise Strategy

Enterprise Pillar

E3 Enterprise Strategy
23 November 2010 Tuesday Morning Session
Instructions to candidates

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).
ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.
You should show all workings as marks are available for the method you use.
The pre-seen case study material is included in this question paper on pages
2 to 7. The unseen case study material, specific to this examination, is
provided on pages 8 to 10.
Answer the compulsory questions in Section A on page 11. This page is
detachable for ease of reference.
Answer TWO of the three questions in Section B on pages 14 to 17.
Maths Tables and formulae are provided on pages 19 and 20.
The list of verbs as published in the syllabus is given for reference on
page 23.
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 the
questions you have answered.

E3 Enterprise Strategy

You are allowed three hours to answer this question paper.

TURN OVER

The Chartered Institute of Management Accountants 2010

DEF Airport
Pre-seen case study
Overview
DEF Airport is situated in country D within Europe but which is outside the Eurozone. The local
currency is D$. It is located near to the town of DEF. It began life in the 1930s as a flying club
and was extended in 1947, providing scheduled services within central Europe. A group of four
local state governments, which are all in easy reach of the airport (hereafter referred to as the
LSGs), took over the running of the airport in 1961. The four LSGs are named North (NLSG),
South (SLSG), East (ELSG) and West (WLSG). These names place their geographical location
in relation to the airport. In the early 1970s flights from the airport to European holiday
destinations commenced with charter flights operated by holiday companies. In 1986, the first
transatlantic flight was established and the airport terminal building was extended in 1987.
By 1989 the airport was handling 500,000 passengers per year which is forecast to increase to
3.5 million for both incoming and outgoing passengers in the current financial year to 30 June
2011. The airport mainly serves holidaymakers flying to destinations within Europe and only 5%
of the passengers who use the airport are business travellers.
DEF Airport was converted into a company in 1990 and the four LSGs became the
shareholders, each with an equal share. The company is not listed on a stock exchange. The
airport has undertaken extensive development since 2000, with improvements to its single
terminal building. The improvements have mainly been to improve the airports catering facilities
and to increase the number of check-in desks. There has also been investment in the aircraft
maintenance facilities offered to the airlines operating out of the airport.
Governance
The Board of Directors has four Executive directors: the Chief Executive, the Director of
Facilities Management, the Finance Director and the Commercial Director. In addition there is a
Company Secretary and a Non-Executive Chairman. In accordance with DEF Airports Articles
of Association, the Non-Executive Chairman is drawn from one of the four LSGs. The NonExecutive Chairman is the sole representative of all four LSGs. The Chairmanship changes
every two years with each of the four LSGs taking turns to nominate the Chair.
The four LSGs have indicated that they may wish to sell their shareholdings in the airport in the
near future. If any LSG wishes to sell its shares in the airport it must first offer them to the other
three LSGs. Any shares that are not purchased by the other LSGs may then be sold on the open
market. A local investment bank (IVB) has written to the Chairman expressing an interest in
investing in the airport in return for a shareholding together with a seat on the Board.
Mission statement
The Board of Directors drew up a mission statement in 2008. It states At DEF Airport we aim to
outperform all other regional airports in Europe by ensuring that we offer our customers a range
of services that are of the highest quality, provided by the best people and conform to the
highest ethical standards. We aim to be a good corporate citizen in everything we do.

DEF Airport development plan


The Board of Directors produced a development plan in 2009. The Board of Directors consulted
with businesses in the area and followed central government airport planning guidelines. It was
assumed that the views of other local stakeholders would be represented by the four LSGs
which would feed comments to the Board through the Chairman.
The plan relates to the development of DEF Airport and its forecast passenger growth for the
next two decades. The Board proposed that future development of the airport will be phased
and gradual in order to avoid unexpected consequences for the local communities and industry.

November 2010

Enterprise Strategy

Strategic objectives
The following strategic objectives have been established in the development plan:
1. Create a planning framework which enables DEF Airport to meet the demands of the
forecast passenger numbers;
2. Reduce to a minimum the visual and audible impacts of the operation of the airport on
the local environment;
3. Ensure that the airport is financially secure;
4. Improve land based access to the airport;
5. Minimise the pollution effects of the operation of the airport.
6. Maintain / increase employment opportunities for people living close to the airport.
By the year ending 30 June 2015, DEF Airport is expected to support about 3,000 local jobs and
have a throughput of 5 million passengers per year, an increase of 1.5 million from the 3.5
million passengers forecast for the current financial year ending 30 June 2011. In order to
accommodate the forecast increased number of passengers and attain the development
objectives, it will be necessary for the airport to extend its operational area to the east of the land
it currently occupies.
Financial objectives
Extracts from DEF Airports forecast income statement for the year ending 30 June 2011 and
forecast statement of financial position as at that date are presented in the Appendix. The four
LSGs have made it clear to the Board of Directors that the airport must at least achieve financial
self-sufficiency. The financial objectives of the airport are to ensure that:
1. The airport does not run at a loss;
2. All creditors are paid on time;
3. Gearing levels must not exceed 20% (where gearing is defined as debt to debt plus
equity) and any long-term borrowings are financed from sources approved by the four
LSGs.
Corporate Social Responsibility
A key feature of DEF Airports development plan is to develop Sustainable Aviation initiatives
in order to reduce the effects of flying on the environment. One effect on the environment is that
the airport is subject to specific planning restrictions affecting flights between the hours of 11
p.m. (2300 hours) and 7 a.m. (0700 hours) to reduce aircraft noise. Flights are permitted
between these times, but must be specially authorised. Typically, flights between these times
would be as a result of an emergency landing request.
A leading international consultancy, QEG, which specialises in auditing the corporate social
responsibility (CSR) issues of commercial enterprises, has offered to provide a CSR audit to
DEF Airport free of charge. QEG is based in the USA and hopes to expand by offering its
services to European enterprises.
DEF Airports competitors
TUV Airport is located about 100 kilometres away from DEF Airport and serves a highly
populated industrial city. The Board of Directors of DEF Airport considers TUV Airport to be its
main competitor. There are another three competing airports within 80 kilometres of DEF Airport.
TUV Airport purchased one of these three competitor airports and subsequently reduced
services from it in order to reduce the competitive threat to itself.
Airlines
Airlines are keen to negotiate the most cost effective deal they can with airports. DEF Airport
applies a set of standard charges to airlines but is aware that some of its competitor airports
have offered inducements to airlines in order to attract DEFs business.
Airlines across the world are facing rising fuel and staff costs as well as strong competition from
within the industry. There has been an overall increase in customer demand for air travel in
recent years and low-priced airlines have emerged and are threatening the well-established,

Enterprise Strategy

November 2010

traditional airlines. Consequently, the traditional airlines have begun to cut the number of
destinations to which they fly.
There are several low-priced airlines that serve DEF Airports competitors, but only one, S, also
operates out of DEF Airport. S is exploring ways in which it might increase its flights to and from
DEF Airport.
DEFs Board of Directors has been approached by a North American airline that wishes to
operate services from DEF Airport. This airline specialises in flights for business and first class
passengers. However, this airline insists that it would pay DEF Airport in US$. This is contrary to
the airports policy of accepting payment only in D$, which is the local currency.
Analysis of revenue by business segment
The forecast split of total revenue of D$23.4 million by business segment for the current financial
year ending 30 June 2011 is:
%
Aviation income
48
Retail concessions at the airport
20
Car Parking
15
Other income
17
(Other income includes income from property rentals, and other fees and charges.)
DEF Airport offers discounts for prompt payment.
Aviation income
In addition to the standard charges, which are set out below, there is a range of surcharges
which are levied on airlines for such items as noisy aircraft (charged when aircraft exceed the
Government limits for acceptable noise levels), recovery of costs and expenses arising from
cleaning or making safe any spillages from aircraft and extraordinary policing of flights (for
example, arrests made as a result of anti-social behaviour on aircraft).
Standard charges made by DEF Airport to the airlines:
Charges per aircraft
Landing charges large aircraft:
Landing charges medium aircraft:

D$300
D$170

Parking charges for the first two hours are included in the landing charge. Thereafter, a charge
of D$200 per hour is imposed for each large aircraft and D$250 per hour for each medium
aircraft. The parking charge is lower for large aircraft because they take at least two hours to
clean and refuel, so they almost always have to pay for an hours parking, and also because
there is less demand for the parking areas used for large aircraft. Medium aircraft tend to take
off again within one hour of landing. Approximately 10% of medium sized aircraft landings result
in the airline incurring parking charges for one hour. This is normally either because their
scheduled departure time requires them to park or because of delays imposed by air traffic
restrictions, technical malfunctions or problems with passengers.
Charges per passenger
Passenger Load:
Flights to European destinations:
Flights outside Europe:

D$1.60 per departing passenger


D$4.00 per departing passenger

Passenger security

November 2010

D$1.20 per passenger arriving or departing

Enterprise Strategy

Retail concessions
DEF Airport provides the facilities for a range of shops, bureau de change (dealing in foreign
exchange currency transactions for passengers), bars and cafes for the budget conscious
passenger.
DEF Airport has a monopoly in the provision of retail concessions and therefore faces no
competition.
Car parking
Car parking is an important source of DEF Airports revenue. The airport has extended its own
car parking facilities for customers over recent years. Car parks occupy a large area of what was
green belt land (that is land which was not previously built on) around its perimeter. The land
was acquired by the airport specifically for the purpose of car parking. A free passenger bus
service is provided to take passengers to and from the car parks into the airport terminal
building.
Competitors have established alternative car parking facilities off-site and provide bus services
to and from the airports terminal. The parking charges made by the competitors are lower than
those levied by the airport. Competitor car park operators offer additional services to
passengers, such as car maintenance and valeting, which are undertaken while the car is left in
their care.
DEF Airport does not have a hotel on its premises. There is a hotel within walking distance of
the airport which offers special rates for passengers to stay the night before their flight and then
to park their cars at the hotel for the duration of their trip.
Other income
This heading contains a mixture of revenue streams. The Commercial Director reported that
some have good growth prospects. Property rental income is likely to decline though as there
has been much building development around the airport perimeter.
DEF Airport security
Passengers and their baggage are required to go through rigorous security checks. There is a
fast track service provided which can be accessed by all passengers at an extra charge. This is
intended to speed up the security process. However, on some occasions this leads to
passengers on the normal route becoming frustrated because they are required to wait in
lengthy queues to pass through the security checks. Airport security staff are required by law to
search all departing passengers and their baggage for suspicious or dangerous items. On the
very rare occasions that they discover anything they report their concerns to the police. There
are always several police officers on patrol at the airport at any given time and so the police can
respond to any report very quickly.
In addition to passenger and baggage screening, DEF Airport security staff are responsible for
the security of parked aircraft and airport property. They do this primarily by monitoring all
arriving and departing vehicles and their drivers and by monitoring the many closed circuit
television cameras that cover the airport.
The airport has had a good record with regard to the prevention of theft from passenger
baggage. This is frequently a serious matter at other airports, but DEF Airport has received very
few complaints that baggage has been tampered with. DEF Airports Head of Security regards
the security of baggage as very low risk because of this low level of complaints.
The Head of Security at DEF Airport was appointed to his current role in 1990, when the airport
was very much smaller than it is today. He was a police sergeant before he joined the airport
staff. Immediately before his appointment he was responsible for the front desk of DEF towns
main police station, a job that involved managing the day-to-day activities of the other police
officers on duty. He was happy to accept the post of Head of Security because the police service
was starting to make far greater use of computers. He had always relied on a comprehensive
paper-based system for documenting and filing reports.

Enterprise Strategy

November 2010

The Head of Security is directly responsible for all security matters at DEF Airport. In practice, he
has to delegate most of the actual supervision of staff to shift managers and team leaders
because he cannot be expected to be on duty for 24 hours per day or to manage the security
arrangements in great detail while administering the security department. The overall
responsibilities of the Head of Security have not been reviewed since his appointment.
Strategic options
The Board of Directors is now actively considering its strategic options which could be
implemented in the future in order to meet the strategic objectives which were set out in the
airports development plan.

November 2010

Enterprise Strategy

APPENDIX 1
Extracts of DEF Airports forecast income statement for the year ending 30 June
2011 and statement of financial position as at 30 June 2011
Forecast income statement for the year ending 30 June 2011
Note
Revenue
Operating costs
Net operating loss
Interest income
Finance costs
Corporate income tax expense
LOSS FOR THE YEAR

D$000
23,400
(25,450)
(2,050)
70
(1,590)
(130)
(3,700)

Forecast statement of financial position as at 30 June 2011


D$000
ASSETS
Non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets

150,000
400
9,250
3,030
12,680
162,680

EQUITY AND LIABILITIES


Equity
Share capital
Share premium
Revaluation reserve
Retained earnings
Total equity
Non-current liabilities
Long term borrowings
Current liabilities
Trade and other payables
Total liabilities
Total equity and liabilities

17,700
530
89,100
23,200
130,530

22,700
9,450
32,150
162,680

Notes:
1. Operating costs include depreciation of D$5.0 million.
2. There are 17.7 million ordinary shares of D$1 each in issue.
3. The long-term borrowings comprise a D$6.3 million loan for capital expenditure which is
repayable on 1 July 2015 and D$16.4 million owed to the 4 LSGs. This has no fixed
repayment schedule and is not expected to be repaid in the next year.

End of Pre-seen Material


The unseen material begins on page 8
TURN OVER

Enterprise Strategy

November 2010

SECTION A 50 MARKS
[You are advised to spend no longer than 90 minutes on this question]

ANSWER THIS QUESTION


Question One
Unseen case material
DEF Airports competitiveness
The Board is concerned about the competitiveness of the airport and there is disagreement
within the Board about the best means of competing. One Board member, who has spent most
of his working life at DEF Airport, believes that the airport has a local monopoly in its immediate
location and that this locational advantage is all that is needed for a successful competitive
strategy.
However, other Board members who have recent working experience at other profit-making
airports, within and outside Europe, think that DEFs competitive advantage has been reduced
by the low-priced airlines that operate from other airports. Within Europe the low-priced airlines
have been very successful and passengers are willing to travel further to an airport for cheaper
flights, making DEFs location less significant. The low-priced airlines emphasise low fares, costcontainment and operating efficiencies such as online check-in facilities and no ticketing.
The Commercial Director has recently been researching the topic of competitiveness to assist
his Board colleagues. He has noted that there are two very distinct types of customer serviced
by, and, producing revenue for, DEF Airport. The first type of customer is the clients of the
airport: namely the airlines, and these create Aviation Income and contribute to Other Income.
The other type of customer is the airline passenger who will use the Retail and Car Parking
facilities at DEF Airport because they are passengers on airlines which are using DEF Airport.
Both types of customer will have its own particular needs and wants and DEF Airport may have
to meet these in different ways if it is to achieve sustainable competitive advantage.
The Commercial Director has also informed his colleagues of the findings of a recent survey of
European air passengers. The survey of business and first class travellers revealed that
business and first class passengers valued Distinctiveness and this was a big factor in their
choice of airport.
Distinctiveness was defined in the survey by such factors as having:
the leading airlines operating from the airport not the low-priced airlines
luxury passenger lounges
high class restaurants
large duty free shops with an extensive range of the most exclusive brands
One passenger in the survey summarised 'Distinctiveness' as 'Offering something which nobody
else offers'.
Future strategic development
DEF Airports process of strategic development is set within the context of its mission statement
published in 2008 which states At DEF Airport we aim to outperform all other regional airports in
Europe by ensuring that we offer our customers a range of services that are of the highest
quality, are provided by the best people and conform to the highest ethical standards. We aim to
be a good corporate citizen in everything we do.
Following on from the mission statement, the Board of Directors produced a development plan in
2009. The Board of Directors consulted with businesses in the area and took account of central
November 2010

Enterprise Strategy

government airport planning guidelines. It was assumed that the views of other local
stakeholders would be represented by the four LSGs which would feed comments to the Board
through the Chairman.
The plan relates to the development of DEF Airport and its forecast passenger growth for the
next two decades. It is proposed that future development of the airport will be phased and
gradual in order to avoid unexpected consequences for the local communities and industry. A
key feature of DEF Airports development plan is to develop Sustainable Aviation initiatives in
order to reduce the effects of flying on the environment.
Strategic development
DEFs strategic objectives are set out in the pre-seen material on page 3.
Future ownership
The four LSGs have indicated that they may wish to sell their shareholdings in the airport in the
near future. If any LSG wishes to sell its shares in the airport it must first offer its shares to the
other three LSGs. Any shares that are not purchased by the other LSGs may be sold on the
open market. A local investment bank (IVB) has written to the Chairman expressing an interest
in investing in the airport in return for a shareholding together with a seat on the Board.
IVB has a track record of investing in businesses that are under-performing in terms of profit. In
the past when IVB has achieved control of such a business it has engaged in severe cost-cutting
to boost the profitability of the business. This prepares the business for a rapid sale to a third
party at a substantial profit for IVB. IVB describes itself as the business turnaround experts.
IVB has carried out this process four times since 2007. The results for IVB have been very
successful in terms of profit for its shareholders but it has been heavily criticised because its
actions have led to large-scale job losses in the businesses it has turned around. The Chief
Executive of DEF Airport has expressed strong concern to the Chairman about the approach
from IVB as he believes that such investment could have very serious consequences for the
airport.
Cargo Handling Services
The Director of Facilities Management has been researching the possibility of offering cargo
handling services at DEF Airport as a way of increasing profits. The introduction of such services
would enable DEF Airport to more fully utilise existing plant and buildings and would not require
capital investment. However, DEF Airport would have to increase its expenditure on fixed costs
and would also have to employ additional direct labour. The Director of Facilities Management
estimates that the earliest the cargo handling services would become operational would be in
2014 as DEF Airport would have to obtain government permissions and secure contracts with
shipping agents and transportation companies.
The Director of Facilities Management has discussed this project with the Finance Director who
said she welcomed any project which would improve DEF Airports finances. However, she
added because the project is some time away and is based on a number of estimates, it is
unlikely to get the Board of Directors approval unless it offers at least D$200,000 a year in profit
from 2014.
The Director of Facilities Management has assembled the following estimates about the
introduction of cargo handling services:
1.
If the cargo handling services had been in operation in the year to 30 June 2010 this
would have generated a revenue of D$1.5 million which would have increased by 10% per year
until the first year of actual operations in the year to 30 June 2014.
2.
If cargo handling services are introduced into DEF Airport there will be fixed costs of
D$400,000 each year from the date of their introduction.

TURN OVER
Enterprise Strategy

November 2010

If DEF introduces cargo handling services in 2014, arising from the cargo handling revenue,
there will be:

a 10% probability of a 40% contribution margin


a 20% probability of a 30% contribution margin
a 70% probability of a 25% contribution margin

End of unseen material


The requirement for Question One is on the opposite page which is
detachable for ease of reference

November 2010

10

Enterprise Strategy

Required
(a)

Advise the Board how DEF Airport could achieve sustainable competitive
advantage as defined by Professor M Porter.
Your advice should include discussion under the following headings:
(i)

Overall cost leadership;

(ii)

Differentiation; and

(iii)

Either: Cost focus or Differentiation focus.

(7 marks)
(7 marks)
(7 marks)
Note: You are not required to draw Porter's generic competitive strategy model

(b)

If IVB becomes one of the shareholders in DEF Airport, advise the Board:
(i)

why its approach to strategy formation and its mission might be challenged
by IVB;
(6 marks)

(ii)

which of the six strategic objectives in the development plan might be


opposed by IVB; give reasons for your choices;
(6 marks)
how the future operations of the Airport might be affected.
(7 marks)

(iii)

(c)

Recommend, with reasons, whether the cargo handling services project should be
undertaken. Your recommendations should be based solely on the outcome for
2014.
Note: 6 marks are available for calculations
(10 marks)
(Total marks for Question One = 50 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 14
TURN OVER

Enterprise Strategy

11

November 2010

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November 2010

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Enterprise Strategy

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TURN OVER

Enterprise Strategy

13

November 2010

SECTION B 50 MARKS
[You are advised to spend no longer than 45 minutes on each question in this section]

ANSWER TWO OF THE THREE QUESTIONS 25 MARKS EACH


Question Two
DLC is a company which provides private telephone network services. It sells its services
exclusively to business customers and, since its foundation in 2007, DLC has been very
successful. DLC has been able to charge a premium price for its services and in financial years
2008 and 2009 achieved a Return on Capital Employed (ROCE) of 50% and 48% respectively.
DLCs success has been built on excellence in two key success factors: Technological
Innovation and Customer Service. DLC currently employs 80 people and in 2010 will have
annual revenue of $24 million.
Technological innovation
DLC has been able to continually innovate its services based on the leading edge skills of its
founder and chief executive, X, who previously worked in a research institute. DLCs
technological innovation also requires substantial, continued capital investment and DLC spent
$6 million on this in 2009. X owns 100% of DLCs share capital. X has been able to attract
several of her former colleagues to join DLC and they have contributed to the culture of research
excellence and technological innovation.
Customer service
DLCs business has been the design, installation and maintenance of private telephone
networks for large organisations. A recent contract completed by DLC was for a large media
organisation to provide a network to support 7,000 current users, with provision for this number
to be extended to 10,000 within three years. This type of business is very rewarding for DLC as
it is not price sensitive. However, meeting the service requirements of the client is vitally
important.
DLCs control system
DLC's only financial control system is a traditional one of budgetary control. Budgets are
prepared using the actual levels of expenditure for the previous budget year together with an
additional amount designed to reflect forecast levels of inflation. Monthly management accounts
are prepared in which actual expenditure is compared to budgeted expenditure. DLC also
computes monthly its overall Return On Capital Employed (ROCE) which X considers to be the
best control measure available for her to use.
DLC has no system which explicitly sets targets and reports upon Technological Innovation and
Customer Service. X considers DLCs performance in these two areas is best represented by
the companys ROCE. DLCs sales achievement against budget is reported upon in total: there
is no attempt made at sectional analysis. When X started DLC, she knew every detail about
every customer and contract and their levels of profitability. However, as DLC has expanded she
can no longer do this, which she feels is a weakness.
DLCs strategic aims
DLC has no formal written statement of strategy. However, X has expressed the following
strategic aims: she wants the company to continue expanding within the same market/business
segment, and to provide a rewarding lifestyle for herself and secure well-paid jobs for DLC's
employees.

The requirement for Question Two is on the opposite page

November 2010

14

Enterprise Strategy

Required
(a)

Discuss the usefulness and limitations of DLC's control system.


(12 marks)

(b)

Advise X how non-financial performance measures could assist in the


evaluation of DLC's two key success factors.
(6 marks)

(c)

Evaluate how Customer Profitability Analysis could assist in the achievement


of X's strategic aims for DLC.
(7 marks)
(Total for Question Two = 25 marks)

Section B continues on the next page

TURN OVER
Enterprise Strategy

15

November 2010

Question Three
JKL is a small European company based in the south of the UK which employs 35 people. It has
an annual revenue of 9 million. One aspect of its recently formulated strategy is an aspiration to
expand into a neighbouring country, France, by means of organic growth.
The reason that JKLs strategy for expansion is based on organic growth is due to JKLs past
experience. Two years ago, the directors of JKL negotiated the purchase of a UK business,
LMN, located in the west of the UK. At the time of this acquisition, LMN was regarded by JKL as
having complementary capabilities and competences. However, within a short time after the
acquisition, JKL judged it to have been a failure and LMN was sold back to its original owner at a
loss for JKL.
JKL employed consultants to analyse the reasons for the failure of the acquisition. The
consultants concluded that the failure had happened because:
1.

JKL and LMN had very different accounting and control systems and these had not been
satisfactorily combined;

2.

JKL and LMN had very different corporate cultures and this had posed many difficulties
which were not resolved;

3.

JKL had used an autocratic management style to manage the acquisition and this had
been resented by the employees of both companies.

The consultants recommended that JKL should consider the use of change agents to assist in
any future acquisitions.
JKL has learnt that a French competitor company, XYZ, may shortly be up for sale at a price
which would be very attractive to JKL. XYZ has a very good reputation in its domestic market
for all aspects of its operations and its acquisition would offer JKL the opportunity to widen its
skill set. None of JKLs staff speaks fluent French or is able to correspond in French. A small
number of XYZs staff speak English fluently but none of its staff are able to correspond in
English.

Required
(a)

Discuss, in the context of JKL, the respective advantages and disadvantages of


pursuing a strategy of expansion by:

(i)
(ii)

Organic growth
Acquisition;
(8 marks)

(b)

Recommend what actions JKL should take to prevent the difficulties that
occurred in the failure of the acquisition of LMN from happening if it acquires
XYZ.
(9 marks)

(c)

Discuss how a change agent could assist in the successful acquisition of XYZ.
(8 marks)
(Total for Question Three = 25 marks)

Section B continues on the opposite page

November 2010

16

Enterprise Strategy

Question Four
Y is the proprietor of a small business which provides gardening services. It has been
established for three years. Y does not employ anyone in her business as she prefers to keep
her business simple and to minimise the amount of administration. Y operates her business as a
lifestyle business: A lifestyle business has been defined as 'A small commercial enterprise
operated more for the owner's enjoyment and satisfaction than for the profit it earns'. Her
business is not a high-growth business. It exists to provide her with an income sufficient to give
her the lifestyle she desires.
Y has invested in her business so that she has all the machinery to enable her to provide a wide
range of gardening services. She has established a list of ten key customers which together
yield her sufficient income. She frequently gets requests from potential new customers because
of her excellent reputation for creativity and reliability. However, she will only take on a new
client if an old client leaves; this rarely happens.
Y has invested very little in information technology. She has a mobile phone which has all her
customers numbers entered in the memory. She also maintains a large diary each year which
records the work she has done and which is the basis for her invoicing. Y writes her invoices by
hand and thinks that all her customers pay her regularly, although she never checks if there are
any amounts outstanding. Once a year she lends her diary to her accountant who deals with her
tax affairs. Y has kept all the yearly diaries from the start of her business. Y does not own a
computer.
Y was married six months ago and her husband is a full-time student so all of the family income
comes from Ys gardening business. Y has recently learnt that she is having a baby and she is
concerned that her income will be insufficient to support her family. Y is aware that a contract for
the maintenance of a large luxury hotels grounds will be up for tender in the near future. The
hotel contract will run for the next two years, with the possibility of a rolling annual extension,
dependent upon Y meeting the high levels of quality and service expected by the hotel. The
hotel has a reputation for excellence and will be a very demanding client. However, the hotel
pays premium prices to its suppliers which it monitors very closely for adherence to contract
specifications.
If she secures the contract, Ys income would increase and become adequate for her new
needs. However, in order to carry out the contract and continue to service the ten existing
customers, Y would need to employ at least three gardeners and an administrative assistant to
deal with the hotels requirements.

Required
Assuming Y secures the hotel contract:

(a)
(b)

(c)

Discuss whether she will be able to maintain her lifestyle business strategy.
(4 marks)
Advise Y of the purposes and benefits of using in her business:
(i)
an information systems strategy;
(ii)
an information technology strategy;
(iii)
an information management strategy.
(12 marks)
Recommend what actions Y will have to take to implement each of the three
strategies referred to in (b).
(9 marks)
(Total for Question Four = 25 marks)

End of Question Paper


Maths Tables and Formulae are on Pages 19 and 20
Enterprise Strategy

17

November 2010

This page is blank

November 2010

18

Enterprise Strategy

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
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820

2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673

3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124

12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104

13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087

Enterprise Strategy

Interest rates (r)


4%
5%
0.962
0.952
0.925
0.907
0.889
0.864
0.855
0.823
0.822
0.784
0.790
0.746
0.760
0.711
0.731
0.677
0.703
0.645
0.676
0.614
0.650
0.585
0.625
0.557
0.601
0.530
0.577
0.505
0.555
0.481
0.534
0.458
0.513
0.436
0.494
0.416
0.475
0.396
0.456
0.377

6%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312

7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258

8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215

9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178

10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149

Interest rates (r)


14%
15%
16%
0.877
0.870
0.862
0.769
0.756
0.743
0.675
0.658
0.641
0.592
0.572
0.552
0.519
0.497
0.476
0.456
0.432
0.410
0.400
0.376
0.354
0.351
0.327
0.305
0.308
0.284
0.263
0.270
0.247
0.227
0.237
0.215
0.195
0.208
0.187
0.168
0.182
0.163
0.145
0.160
0.141
0.125
0.140
0.123
0.108
0.123
0.107
0.093
0.108
0.093
0.080
0.095
0.081
0.069
0.083
0.070
0.060
0.073
0.061
0.051

17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043

18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037

19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031

20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026

19

November 2010

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

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046

2%
0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.679
16.351

3%
0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.878

Interest rates (r)


4%
5%
6%
0.962
0.952
0.943
1.886
1.859
1.833
2.775
2.723
2.673
3.630
3.546
3.465
4.452
4.329
4.212
5.242
5.076
4.917
6.002
5.786
5.582
6.733
6.463
6.210
7.435
7.108
6.802
8.111
7.722
7.360
8.760
8.306
7.887
9.385
8.863
8.384
9.986
9.394
8.853
10.563 9.899
9.295
11.118 10.380 9.712
11.652 10.838 10.106
12.166 11.274 10.477
12.659 11.690 10.828
13.134 12.085 11.158
13.590 12.462 11.470

7%
0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594

8%
0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818

9%
0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129

10%
0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963

12%
0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469

13%
0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025

Interest rates (r)


14%
15%
16%
0.877
0.870
0.862
1.647
1.626
1.605
2.322
2.283
2.246
2.914
2.855
2.798
3.433
3.352
3.274
3.889
3.784
3.685
4.288
4.160
4.039
4.639
4.487
4.344
4.946
4.772
4.607
5.216
5.019
4.833
5.453
5.234
5.029
5.660
5.421
5.197
5.842
5.583
5.342
6.002
5.724
5.468
6.142
5.847
5.575
6.265
5.954
5.668
6.373
6.047
5.749
6.467
6.128
5.818
6.550
6.198
5.877
6.623
6.259
5.929

17%
0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628

18%
0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
7.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353

19%
0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101

20%
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
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 =

1
1
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:

PV =

1
r

November 2010

20

Enterprise Strategy

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Enterprise Strategy

21

November 2010

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November 2010

22

Enterprise Strategy

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
Level 1 - KNOWLEDGE
What you are expected to know.

Level 2 - COMPREHENSION
What you are expected to understand.

VERBS USED

DEFINITION

List
State
Define

Make a list of
Express, fully or clearly, the details/facts of
Give the exact meaning of

Describe
Distinguish
Explain

Communicate the key features


Highlight the differences between
Make clear or intelligible/State the meaning or
purpose of
Recognise, establish or select after
consideration
Use an example to describe or explain
something

Identify
Illustrate
Level 3 - APPLICATION
How you are expected to apply your knowledge.

Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate

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

Level 5 - EVALUATION
How are you expected to use your learning to
evaluate, make decisions or recommendations.

Enterprise Strategy

Analyse
Categorise
Compare and contrast

Put to practical use


Ascertain or reckon mathematically
Prove with certainty or to exhibit by
practical means
Make or get ready for use
Make or prove consistent/compatible
Find an answer to
Arrange in a table

Construct
Discuss
Interpret
Prioritise
Produce

Examine in detail the structure of


Place into a defined class or division
Show the similarities and/or differences
between
Build up or compile
Examine in detail by argument
Translate into intelligible or familiar terms
Place in order of priority or sequence for action
Create or bring into existence

Advise
Evaluate
Recommend

Counsel, inform or notify


Appraise or assess the value of
Advise on a course of action

23

November 2010

Enterprise Pillar

Strategic Level Paper

E3 Enterprise Strategy

November 2010

Tuesday Morning Session

November 2010

24

Enterprise Strategy

The Examiner's Answers November 2010


E3 - Enterprise Strategy
SECTION A
Answer to Question One
Requirement (a)
Porter's model of competitive advantage is predicated on the following concepts:
Overall cost leadership
Differentiation
Focus
These concepts are combined to give the following strategic options:
1. Overall cost leadership
2. Differentiation
3. Cost focus
4. Differentiation focus
Porter maintains that the model is generic, in that it provides a systematic means of
classification which can be applied to all firms and all strategies. If the model is applied
successfully in the development of strategy it can lead to long-term or sustainable competitive
advantage where the firm outperforms others in its industry.
Applying these ideas of Porter to the situation of DEF Airport gives the following:
(i)
Overall cost leadership
This option would require DEF to be the lowest cost airport operator with respect to its
competitors. TUV airport which is approximately100 kilometres away is regarded by DEF as
being its major competitor and there are three other airports within 80 kilometres of DEF
which are lesser competitors. It would be useful for the Board to commission a competitor
analysis for DEF if this has not been done recently. The Board would also have to consider
the nature of the competition which it faces because its competition will not be monolithic, that
is, there is not one competitor competing on one basis against DEF. This is because DEF is
competing in a number of different markets as shown by the analysis of its revenue which is
made up of the following components:

Aviation income
Retail concessions
Car parking
Other income (including property income, cargo handling and other fees and charges)

Enterprise Strategy

November 2010

It is likely that competitor analysis will show that DEF has a range of competitive performance
when compared against the different aspects of the revenue stream, for example, it may be
very successful in respect of its retail concessions because it has total control over the
granting of these concessions. However, as regards car parking, this may not be as profitable
because of the competition from parking operations outside, but close to, the airport
boundaries.
In order to apply successfully a strategy of overall cost leadership, DEF needs to analyse the
cost structures of its various activities, identify those which are most competitive and where
this is likely to be sustainable. It would also benefit from analysing its competitors cost
structures where this is possible. Where the market in which it competes is mature and the
competition is intense, it is unlikely that DEF will be successful in pursuing a policy of overall
cost leadership because it will not possess any unique cost advantage.
(ii)
Differentiation
This strategy depends upon creating something that is regarded as being unique or special
and, because of this, customers are willing to pay a premium price. There are many ways in
which differentiation can be achieved but before pursuing it DEF needs to consider the factors
explained in (i), namely that it is unlikely to be able to apply this strategy to every aspect of its
business. However, DEF does possess some unique aspects: the first is its geographical
position and secondly, within the airports boundaries, it has a degree of monopoly power in
that every airline, retail outlet and service agent is only present at the airport by agreement
with DEF. No one has a right to trade at DEFwithout DEFs permission.
One area of possible sustainable competitive advantage for DEF is offered by the findings of
the recent survey of European air passengers. The survey revealed that business and first
class passengers valued distinctiveness. Business and first class passengers are analogous
to customers willing to pay a premium price. If DEF could provide a service to these
passengers which is distinctive or as one respondent expressed it, Offering something
which nobody else offers, DEF could achieve long-term competitive advantage. The survey
identified the characteristics of distinctiveness': having the leading airlines operating from the
airport not the low-priced airlines, luxury passenger lounges, high class restaurants and
extensive duty free shops with the best exclusive brands. If this strategy is to be chosen it is
likely to involve DEF in significant capital expenditure as it would need to up-grade its
facilities.
DEF could use Johnson and Scholes three tests to evaluate the suitability, acceptability and
feasibility of following a strategy of differentiation based on distinctiveness designed to
deliver sustainable competitive advantage. However, a differentiation strategy within Porters
model has a broad scope: it should be directed to the entire industrys business and first class
passengers: this may not be feasible. (See Differentiation focus below).
(iii)
Cost focus
This strategy would involve DEF offering services at a lower cost to a particular segment of a
market. As it serves a number of markets, as evidenced by the components of its revenue
stream, this gives the possibility of successfully pursuing a cost focus strategy in one or more
segments. A cost focus, or niche strategy, implies that DEF can provide a service better to a
particular market segment than rivals who are attempting the whole of the market. Aviation
income is the single most important component of DEFs revenue and DEF already has one
low-cost carrier as a client. It may be possible to offer a cost focus strategy to one or more
low-priced airlines but there will be a limit to the number to which this can apply. The lower
costs extended by DEF to its clients need to be outweighed by benefits, such as higher
turnover and complementary business if its overall profitability is not to be adversely affected.
There is also the danger that the pursuit of a cost focus strategy could change into overall
cost leadership as clients who have not been offered the low cost deal ask for it to be
extended to themselves also.

November 2010

Enterprise Strategy

A further problem could arise if DEF decides to pursue a differentiation strategy based on the
concept of distinctiveness. One aspect of distinctiveness identified by the recent passenger
survey was that it meant having the leading airlines operating from the airport not the lowpriced airlines and this is in direct contradiction to a cost focus strategy embracing low cost
airlines.
This dilemma was anticipated by Porter who warned of the dangers of being stuck in the
middle: that is, a business should decide whether it will compete by low costs or by
differentiation. To attempt to follow both strategies is likely to end in failure.
Differentiation focus
Like the cost focus strategy, differentiation focus relies on DEF being able to address itself
better to a market segment than its broader scope rivals can. DEF should identify market
segments where it can provide services that its rivals do not. This could be within its region,
say within a 20 mile radius of the airport, or to a particular buyer group, for example,
dedicated cargo handling service for exporters. A differentiation strategy based on
distinctiveness was discussed above. It may not be feasible for DEF to offer this strategy to
the entire industry, for example, it may not be attractive to all its customers if DEF is not
located near the countrys capital city. However, the strategy may be feasible as a focus
strategy when it addresses the market segment that live within commuting distance of the
airport.

Requirement (b)(i)
The Board has produced a development plan which ... reviews the development of DEF
Airport and its forecast growth in passengers for the next two decades. Clearly, the Board is
taking a long-term view of the airport and its strategy.
It is also stated that future development of the airport will be phased and gradual in order not
to create unexpected consequences for the local communities and local industry. The
development plan has also introduced the concept of Sustainable Aviation which is designed
to reduce the effects of flying on the environment and which restricts night-time flying
operations. The mission statement also makes reference to conform(ing) to the highest
ethical standards. These policies indicate the Boards acceptance of its responsibilities to its
various stakeholders rather than solely to its shareholders.
Another important environmental aspect influencing the development plan is that the existing
four shareholders are local state governments (LSGs) and the Boards Non-Executive
Chairman is always drawn from one of the four LSGs. It is likely, therefore, that the Chairman
is a local politician and that the LSGs will be interested in the Airport as a means of promoting
their social and economic objectives. The Airport is not listed on a stock exchange and is not,
consequently, directly responsible to financial markets.
IVB
The culture and objectives of IVB are very different to those of The Board. The manner of
working of the Board and its objectives and strategy are likely to be challenged by IVB.
IVB, the investment bank, describes itself as the business turnaround experts. It looks for
businesses which have underperformed in terms of profits and changes these businesses by
severe cost-cutting which boosts their profitability. Its severe cost-cutting has led to large
scale job losses in the businesses it has turned around. At the conclusion of the turnaround
process IVB rapidly sells its businesses to third parties. IVB is a short-term investor as
evidenced by its track record since 2007 whereas the Board, as evidenced by its published
mission statement and strategic development plan are long-term investors. The Board has
also expressed its concern for 'Sustainability' and its desire to be a 'good corporate citizen'.
Neither of these concerns has been expressed by IVB whose sole concern, judging by its
track record, is to make good short-term profits for its shareholders; it seemingly has no longterm interest in developing any of the businesses which it buys into.

Enterprise Strategy

November 2010

Requirement (b)(ii)
The Board of DEF Airport has established six strategic objectives in its development plan and
IVB's likely attitude to each of these as follows:
1. Create a planning framework which enables DEF Airport to meet the demands of the
forecast passenger numbers; This objective does not appear to be too contentious. Such a
framework will be a requirement to help the Board deal with the expansion in passenger
numbers. It may be the case that IVB will not be too interested in this objective as it is not
normally a long-term investor. However, IVB would be interested if the creation of the
planning framework impacts upon the Airport's short-term profits due to any increase in costs.
2. Reduce to a minimum the visual and audible impacts of the operation of the airport on the
local environment; This objective may be open to challenge by IVB as it implies that the Board
will have to invest to achieve the objective. IVBs emphasis has always been on costreduction to enable it to boost profitability with a view to a rapid realisation of its investment.
Any expenditure by the Board with respect to this objective will depress profit in the short-term
and so IVB is likely to oppose this. However, if the objective could be realised successfully in
the short-term it might be a factor in IVB achieving a higher price when it resells its investment
and so it would not oppose it.
3. Ensure that the airport is financially secure; No shareholder would oppose this objective.
However, it is very general and the way it is interpreted operationally may lead IVB to
challenge it.
4. Improvement in land based access to the airport; IVB's attitude to this objective will be
similar to its attitude to objective 1. IVB will only be interested in this objective's effect on
profitability in the short-term.
5. Minimise the pollution effects of the operation of the airport; One feature of the
development plan is the requirement for 'Sustainable Aviation' which is reflected in objective
5. As a short-term investor IVB's attitude to this will reflect its attitude to objectives 2, 3 and 4.
6. Maintain/increase employment opportunities for people living close to the airport; This
objective is most likely to be strongly challenged by IVB. IVB's 'raison d'tre' is cost-cutting by
large-scale job losses in order to increase profitability. This is directly contrary to objective 6
which it will, therefore, oppose.

Requirement (b)(iii)
If IVB buys the shareholding of one or more of the LSGs, it will become a significant
shareholder in DEF Airport and a member of the Board. There are many potential
consequences for the Airport which include the loss of a long-standing shareholder
(whichever LSG sells out to IVB). The complexion of the Board will change and, as discussed
in (b)(ii) above, IVB is likely to challenge some of the strategic objectives established in the
development plan. IVB is also likely to propose its own objectives, for example cost-cutting in
the form of job losses and sale of the Airport to a third party. However, it should be noted
when IVB becomes a shareholder, it will be a minority shareholder, albeit a significant one.
Therefore, it will not have control of the Board and cannot insist on anything but must rely on
persuasion.
An important factor which could have significant consequences will be the price which IVB
pays for its shareholding. If the remaining shareholders consider the price paid to be an
attractive one they may also consider selling their shareholdings to IVB and so it is possible
that IVB could secure control of DEF Airport. In that case, the Board and the Airport would be
subject to radical change. IVB would try to implement its turnaround philosophy which would
involve severe cost-cutting and job losses and a rapid resale.

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Enterprise Strategy

If IVB does not have control it is unlikely that it would accept or strongly support the
development plan in its entirety. This could have some positive benefits to DEF Airport as IVB
could bring a modernising influence to bear on the Board and its strategy for the Airport. IVB
may also be able to introduce the Board to sources of finance which had not been available to
it previously.

Requirement (c)
DEF Airport

Contribution Contribution Contribution


margin

margin

margin

40%

30%

25%

Total

D$
Year ended 30 June
Cargo handling income
Contribution margin

2014

2014

2014

2,196,150

2,196,150

2,196,150

878,460

658,845

549,038

Fixed costs

400,000

400,000

400,000

Profit

478,460

258,845

149,038

Probability
Expected value

0.1

0.2

0.7

47,846

51,769

104,326

203,941

The expected value of the increased profits resulting from the introduction of cargo handling
services is 2% above the criterion of D$200,000 suggested by the Finance Director. However, in
the context of a forecast result this difference is marginal. It is not clear in the case how binding
or formal the D$200,000 criterion is: the context suggests that this is an informal criterion and so
may not be adhered to rigidly.
The expected value is dependent upon numerous forecasts, namely:

The theoretical amount of cargo handling income in 2010 and its subsequent growth rate
Fixed costs
The three levels of contribution margin
The probability estimates

The expected value does not give clear accept/reject guidance. It is likely that the decision will
be made on other grounds, for example, the Director of Facilities Managements credibility,
alternative projects for profit improvement and the projects fit with the airport development plan.
However, as the project does just satisfy the profitability criterion it is recommended for
acceptance.

Enterprise Strategy

November 2010

SECTION B
Answer to Question Two
Requirement (a)
DLC's control system's usefulness
In order for DLC to operate a traditional budgetary control system it must engage in
forecasting and, following on from this, planning. This then results in a system in which
budgeted expenditure is compared to actual expenditure. The system imposes discipline
within DLC as regards its future plans and also in the collection of data regarding actual
expenditure and the monthly reporting thereon. In order to produce DLCs budgets there will
be internal consultation and discussion which should result in a coherent and co-ordinated
operating plan. The targets inherent within this system will also provide a degree of motivation
for DLCs budget managers. DLC also computes its Return On Capital Employed (ROCE)
monthly. ROCE attempts to capture the totality of the businesss performance and provides a
view of the effectiveness of DLCs investments.
DLCs control systems limitations
Traditional control systems have been widely criticised in recent years. Budgeting is
frequently done on a Historic Cost plus inflation basis which means that it is backwardlooking. It is not clear how frequently, if at all, DLC revises its budget estimates, for example,
by use of quarterly plans. Neither does DLC appear to flex its budget for actual levels of
activity nor take account of seasonal variations in expenditure patterns. Although DLC reports
on its sales achievement against budget in aggregate, given the size of DLCs revenue, $24
million, this is unlikely to yield sufficient information for detailed management control.
X relies heavily on the use of ROCE to reflect DLCs performance. However, a number of
flaws are manifest within ROCE. It is arguable that ROCE is not suitable for an organisation
like DLC which is not yet mature. DLC will have had start-up costs which would depress
ROCE but which will not recur. Therefore, historic comparisons of ROCE achievement are
liable to suffer distortion. Another problem arises because of DLCs substantial level of capital
investment. New capital investment will also depress ROCE which might restrict managers
willingness to invest. However, this would be a mistake as DLC requires substantial and
continued capital investment to be successful.
DLC has no system for reporting upon the two critical areas of Technological Innovation and
Customer Service. This is a serious omission as these two areas are the basis of DLCs
success. They, therefore, should be reported upon explicitly, regularly and
contemporaneously. Although ROCE reflects DCLs success in the areas of Technological
Innovation and Customer Service it too is aggregated and probably too late to act as a control
measure.
The final omission concerns DLCs customers. DLC is now too large for X to know everything
about every customer and contract and she has recognised that this is a weakness. It would
be expected that a company like DLC would have systems to report contract and customer
profitability. DLCs lack of these is a weakness.

Requirement (b)
Although X has not articulated a formal strategy she has an implicit one based upon the
following objectives: expansion within the same market/business segment, personal
enrichment and the provision of secure well paid jobs for DLCs staff. It is also implicit that
DLC will endeavour to achieve these objectives by excellence in Technological Innovation
and Customer Service. As DLCs control system is exclusively a financial one it is unable to
capture the richness of DLCs business experience and enable it to maintain and improve its
performance in the two areas critical for its success.
X would, therefore, be assisted in the achievement of her strategic objectives by formalising
excellence in Technological Innovation and Customer Service as Critical Success Factors

November 2010

Enterprise Strategy

(CSFs) and then developing Key Performance Indicators (KPIs) which would indicate the
extent to which the CSFs are being achieved. KPIs can be both financial and non-financial: a
range of non-financial KPIs could provide a creative measure of feedback about DLCs
performance which is not currently available from the financial control system.
The KPIs should be reported upon within a time-scale which is appropriate to the parameter
which is being measured. Thus, for example, it may be appropriate to report against a KPI for
customer complaints (which would be supporting the CSF excellent Customer Service) daily.
However, a KPI measuring innovation in the installation time for a telephone exchange (which
would be supporting the CSF excellent Technological Innovation) would be more
appropriately reported upon against a longer timescale. The KPIs should not be too
numerous otherwise X is likely to be overwhelmed by them: she should also continually keep
their usefulness under review. If DLC is continually meeting or beating a KPI it may be
appropriate to discard this one and introduce a new one so that X may make the best use of
her time.
X has acknowledged that the lack of control information which she has about sales is a
weakness. Non-financial performance measures could address this weakness and contribute
towards X achieving her strategic objectives. KPIs could also be constructed for sales
performance as they are for CSFs.

Requirement (c)
Currently X does not know the profit which DLC makes from each customer. As the annual
revenue in 2010 is $24 million, this is too large for one person to know every detail about it as
she did when the business started.
One of Xs aims is for her business to continue expanding within the same market/business
segment: it is implicit that she wants this expansion to be profitable. In the present
circumstances X is not aware which of her current customers are profitable and which ones
unprofitable. When DLC expands there is a risk that some new customers will also prove to
be unprofitable ones and, possibly, that she might turn away profitable business.
Customer Profitability Analysis (CPA) is defined by CIMA as the Analysis of the revenue
streams and service costs associated with specific customers or customer groups. If X
introduces CPA to her company it will reveal which customers are profitable and, therefore,
should be retained and nurtured. Conversely, CPA will suggest which customers DLC should
consider ceasing to do business with. As X wants to expand her business within the same
market segment CPA could give insights as to the attractiveness of this segment and
guidance as to which new customers and contracts she should accept. CPA could also help X
to evaluate whether other market segments may provide more attractive expansion prospects
in the future.

Enterprise Strategy

November 2010

Answer to Question Three

Requirement (a)(i)
Organic growth
JKL has chosen in its strategy to grow organically. It has been influenced in this choice
because of its recent experience with an acquisition which resulted in failure. It could be
argued that organic growth is less risky than growth by acquisition. This is substantiated by
the empirical evidence which demonstrates in the majority of cases when a company is
acquired, it is the acquired company that benefits financially to the detriment of the acquiring
company. Organic growth is usually achieved by reinvestment of profit which is then applied
to the development of the companys strengths. Therefore, organic growth will happen at a
pace commensurate with the organisations ability to absorb and benefit from it. However, if
organic growth is achieved by reinvestment then the speed of growth will be constrained to an
extent by the amount of profits available for reinvestment. Organic growth will be suitable for a
company where the culture is one of gradualism rather than radicalism: Evolution rather than
Revolution.

Requirement (a)(ii)
Acquisition
In many ways, an evaluation of growth by acquisition is the opposite of organic growth.
Growth by acquisition can be fast, radical and transformational. It can offer opportunities to a
company which otherwise would not be available. Thus, an acquisition target may have
unique competences and capabilities, for example, it may own patents, licences and
commercial and brand franchises, which are otherwise unavailable. Acquisition gives JKL the
possibility of eliminating a competitor. However, the biggest downside to any acquisition is the
empirical evidence which demonstrates that most acquisitions do not benefit the acquirer.

Requirement (b)
1. JKL and LMN had very different accounting and control systems and these had not been
satisfactorily combined
Although at the start of the acquisition process the accounting and control systems of the two
companies will be different they must be made to converge as soon as possible. This is
necessary to preserve the integrity of the published financial statements, for example, it would
not be acceptable for the two companies to value their stocks on different bases. If managers
are subjected to different control systems in the two companies, for example, JKL pays a
bonus if a manager meets her budget targets but XYZ does not, there would be motivational
problems if this continued. JKL would need to review the two systems, identify the differences
and plan for their convergence. The change agent could facilitate this with the help of the
Management Accountant.
2. JKL and LMN had very different corporate cultures and this had posed many difficulties
which were not resolved
In any acquisition JKL will encounter a different culture to its own in the target company. JKL
needs to survey and explicitly recognise the cultural differences and categorise those which
are vital for the success of the acquisition. It should then outline an operational strategy to
reconcile or accommodate these differences. Achievement against the plan should be
regularly reviewed. This process of reconciliation and accommodation could be managed by
the change agent.
3. JKL had used an autocratic management style to manage the acquisition and this had
been resented by the employees of both companies
An autocratic management style implies that there is no delegation of responsibility:
everything is driven from the centre. JKLs use of this style had led to resentment and this, in
turn, would probably lead to resistance. There are a number of alternative management styles
that JKL could use, for example, participation, negotiation and facilitation. JKL should use a
contingency approach and not assume that one management style will be suitable for all
situations and all times.

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Enterprise Strategy

Requirement (c)
A change agent is a person, or a group of people, who help an organisation to achieve
strategic change. In the matter of JKL acquiring a French company, XYZ the change agent
could carry out the following useful tasks:
1. Define any possible difficulties presented by the proposed acquisition
One obvious difficulty presented by the proposed acquisition consists of the potential
problems in communication between the two companies as none of JKLs staff speak fluent
French or are able to correspond in French. XYZ is in a similar position as only a small
number of its staff speak English fluently: none are able to correspond in English. The
change agent would be able to highlight this difficulty for the attention of JKLs management
and to point to the areas of communication which are likely to cause the most problems: for
example, phone conversations may be most problematic because of their ephemeral nature,
e-mails a lesser problem because of their more permanent nature.
2. Examine what causes the problem and diagnose how this can be overcome
In this particular example, the change agent would have no difficulty in diagnosing the cause
of the problem: it is the lack of complementary language skills in both companies. The
solution would be to increase the language skills in both English and French in both
companies.
The more creative role for the change agent in this situation is to propose ways in which this
problem could be overcome. Depending on the background of the change agent he/she may
have to seek expert advice from a linguist experienced in both the English and French
languages. There are a variety of ways to achieve the desired solution that the change agent
could propose. One possible way would be for JKL to employ a language tutor to work with
both companies.
3. Arrive at alternative solutions
In order to give the management of JKL some alternative ways of overcoming the lack of
relevant language skills in the two companies the change agent could suggest alternative
solutions, such as:
JKL could specify that all new appointments at senior management level are bi-lingual
in French and English.
JKL could use the English speaking members of staff at XYZ to coach their
counterparts in JKL in the French language.
JKL could send its senior managers at both companies to external language training.
4. Implement solutions
Once the management of JKL, after consultation with the change agent, have arrived at their
preferred solution it will need to be implemented. The change agent could usefully take the
lead in this process as he/she will be very well-informed about the preferred solution and the
reasons why it has been chosen. If JKLs chosen solution is to employ a language tutor to
work with both companies the change agent could draft the job specification and assist with
the recruitment and induction of the tutor.
5. Transmit the learning process that allows the organisation to deal with change on an
ongoing basis by itself in the future
The change agent should document the learning process and discussions which JKL has
undergone whilst resolving the lack of foreign language skills in both companies. This
experience should be disseminated throughout both companies and the change agent should
take the lead in this by organising workshops for managers and information sessions for
employees.

Enterprise Strategy

November 2010

Answer to Question Four


Requirement (a)
The opportunity offered by the hotel contract can be characterised as a transformational change.
Johnson, Scholes and Whittington defined transformational change as change that is radical and
will move the organisation outside its existing paradigm (way of thinking). This implies a
significant cultural shift for Y which she is going to have to deal with.
Y has operated her business on a small scale in order to give her a particular lifestyle and she
has not been interested in growth so she has turned away new business. As her personal
circumstances are due to change, and she has no other options, she is trying to win the hotel
contract. If she is successful she will have to employ at least 4 staff. She will then have
responsibilities to, and for, four other people. Her business will, therefore, be more complex and
her current administrative systems inadequate. However, her income will increase.
The lifestyle that Y has enjoyed will change if she obtains the hotel contract and she will no
longer be able to maintain her lifestyle business strategy.

Requirement (b)
Information systems strategy (ISS)
An information systems strategy should define the long-term use of information within Ys
business. The ISS will enable Y to specify the systems that will facilitate the use of
information to support her in her new business strategy.
When Y has decided what her new long-term goals are then the ISS can express what
systems (in the broadest sense of the word) are needed to support those goals. The ISS is a
long-term approach expressing how information will be used to support Ys business strategy
and/or create new strategic options. The process of defining her ISS will be an interactive one
with that of defining her new business strategy: each strategy should inform the other. A
benefit of Y looking at information strategically is that it may give her ideas about new ways of
doing business and could lead to her securing a competitive advantage.
Y will also benefit from an ISS as she will have an overall context for the development of how
she will use information within her business. Previously, although she had a number of
sources of business information, for example, her diaries, she made no attempt to exploit this
resource. She could, for example, have analysed the cost structure of different jobs and
revealed her clients profitability. When Y is operating the hotel contract she will have a need
for real-time information to ensure she stays within the contracts specifications. An ISS
should define how she will do this.
Information technology strategy (ITS)
Currently, Y has very little Information Technology (IT) to support her business. She,
therefore, has to move from a position where she relies on her mobile phone to a much more
complex business where she will have to have real-time control information regarding the
hotel contract and also have to administer and pay her four employees. Clearly, Ys diary and
mobile phone will be inadequate in these circumstances.
Y has little experience of using IT within her business and the acquisition of such technology
will involve her in expense. She will benefit from developing an ITS rather than acquiring IT at
random. As IT will become an important part of her business, Y needs to make sure that
what she purchases is reliable, adequate for her needs and will be compatible with her clients
requirements. The latter is particularly important in the case of software. Ys IT requirements
will increase and by drafting an ITS, Y would define what computers, peripherals,
communication links and software she would use in her new expanded business.
As the acquisition of IT will involve Y in increased investment in technology her ITS will
enable her to define her technological needs and identify how and where these will be met.
Part of her ITS will be a budget which she can use to control expenditure and provide
feedforward information for future acquisitions. This will benefit her in the future as lessons

November 2010

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Enterprise Strategy

learnt from IT acquisition should help make better acquisition decisions.


Information management strategy (IMS)
An information management strategy will enable Y to define her approach to managing data
and information within her business and how data and information should be stored and
accessed. She will also use the IMS to describe the roles of the people involved in the use of
information, systems and technology in the larger organisation. As Y will no longer be solely
responsible for the business administration, she should use the IMS to demarcate
responsibilities between herself and the new administrative assistant. Y could also use the
IMS to guide her in the recruitment process for the administrative assistant.
Y will also require real-time information about the hotel contract and the IMS should specify
who will collect this and how it will be done. Potentially, Y, her three gardeners, her
administrative assistant and some of the hotel staff could be involved in this process. The
benefit of an IMS is that it will bring clarity by stating the responsibilities of the different
parties. On the assumption that Y buys a computer for her administrative assistant, the IMS
should define who has access to it and who is responsible for maintaining and up-dating files
and records.
The over-arching benefit of the IMS will be the clarity it gives to the roles and responsibilities
regarding IT within Ys business.

Requirement (c)
In the case of all three strategies Y may be unable to develop them herself due to her lack of
experience. She could seek assistance from her accountant and she may find it necessary to
use an IT consultant to help her develop the strategies.
Information systems strategy
In order for this strategy to be produced Y will have to articulate her new business strategy as
she moves away from managing a lifestyle business. Although she does not have any
employees who will be affected by the new strategy it would be appropriate to discuss it with
her husband who will be affected by it.
In producing the ISS she should examine how information could contribute to her long-term
success. Y has details of all the work she has done in the past three years recorded in her
diaries. She should analyse this data to discover for example, trends in customers demands,
profitability of customers, and seasonality of demand. Ys success has been built on creativity
and reliability. In her ISS she should specify how these attributes could be recorded and acted
upon as they will also be important for her future success.
Information technology strategy
In the future, as well as her current customer base, Y will be dealing with a demanding
customer, the hotel, which expects very close adherence to its contract specification.
Therefore, the scale and complexity of Ys business is going to change in such a way that her
current information technology, a mobile phone and a diary, will be inadequate. Y will need to
budget for her technological requirements.
Y will need to purchase at a minimum:

A wireless enabled computer for her administrative assistant


(Possibly) a laptop for herself
A router
A printer
Software comprising programs for email, word processing, data base and
spreadsheet
A landline

It may be useful for Y to establish an Intranet.

Enterprise Strategy

11

November 2010

Information management strategy


Y now has a number of information users to consider, herself, her administrative assistant,
her three gardeners, her accountant and the hotel. She will need to specify the degree of
connectivity for the various users: for example, instead of passing her diary over to her
accountant at year end she could allow the accountant access to her information systems.
Similarly, with her new customer, the hotel, which closely monitors performance against
contract specification, she will have to establish how she will exchange information. It may be
that the contract has provision for this in which case Y will have to follow the contract
requirement and incorporate this into the IMS.
Y will also need to describe in the IMS the roles and responsibilities of herself and the
administrative assistant.

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Enterprise Strategy