DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO
Enterprise Pillar
Thursday 30 August 2012 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 to 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 8. The unseen case study material, specific to this examination, is provided on pages 10 and 11. Answer the compulsory questions in Section A on page 13. This page is detachable for ease of reference. Answer TWO of the three questions in Section B on pages 16 to 21. Maths Tables and formulae are provided on pages 23 and 24. The list of verbs as published in the syllabus is given for reference on page 27. 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
E3 – Enterprise Strategy
TURN OVER The Chartered Institute of Management Accountants 2012
Pre-seen case study Introduction B Supermarkets (B) was founded as a grocery retailer in a European country in 1963. Its sales consist mainly of food and household items including clothing. B now owns or franchises over 15,000 stores world-wide in 36 countries. The company has stores in Europe (in both eurozone and non-eurozone countries), Asia and North America. B’s head office is located in a eurozone country. B has become one of the world’s largest chains of stores. B’s Board thinks that there are opportunities to take advantage of the rapid economic growth of some Asian countries and the associated increases in demand for food and consumer goods. Structure The B Group is structured into a holding company, B, and three subsidiary companies which are located in each of the regions of the world in which it operates (Europe, Asia and North America). The subsidiary companies, referred to as “Regions” within B, are respectively BEurope, B-Asia and B-North America. Store operations, sales mix and staffing B operates four types of store: supermarkets, hypermarkets, discount stores and convenience stores. For the purpose of this case study, the definition of each of these types of store is as follows: A supermarket is a self-service store which sells a wide variety of food and household goods such as washing and cleaning materials, cooking utensils and other items which are easily carried by customers out of the store. A hypermarket is a superstore or very large store which sells the same type of products as a supermarket but in addition it sells a wide range of other items such as consumer durable white goods, for example refrigerators, freezers, washing machines and furniture. Hypermarkets are often located on out-of-town sites. A discount store is a retail store that sells a variety of goods such as electrical appliances and electronic equipment. Discount stores in general usually sell branded products and pursue a high-volume, low priced strategy and aim their marketing at customers who seek goods at prices which are usually less than can be found in a hypermarket. A convenience store is a small shop or store in an urban area that sells goods which are purchased regularly by customers. These would typically include groceries, toiletries, alcoholic beverages, soft drinks and confectionery. They are convenient for shoppers as they are located in or near residential areas and are often open for long hours. Customers are willing to pay premium prices for the convenience of having the store close by. B sells food products and clothing in its supermarkets and hypermarkets at a higher price than many of its competitors because the Board thinks that its customers are prepared to pay higher prices for better quality food products. B also sells good quality consumer durable products in its supermarkets and hypermarkets but it is forced to sell these at competitive prices as there is strong competition for the sale of such goods. B’s discount stores sell good quality electrical products usually at lower prices than those charged in its supermarkets and hypermarkets, B only sells electronic equipment in its discount stores. Customers have a greater range from which to choose in the discount stores as compared with supermarkets and hypermarkets because the discount stores specialise in the goods which they sell. B’s convenience stores do not have the availability of space to carry a wide range of products and they charge a higher price for the same brand and type of goods which it sells in its supermarkets. Although B owns most of its stores, it has granted franchises for the operation of some stores which carry its name. Nearly 0.5 million full-time equivalent staff are employed world-wide in the Group. B tries when possible to recruit local staff to fill job vacancies within its stores. September 2012
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Value statement and mission In recognition of the strong competitive and dynamic markets in which it operates, B’s Board has established an overall value statement as follows: “We aim to satisfy our customers wherever we trade. We intend to employ different generic competitive strategies depending on the market segment in which our stores trade.” The Board has also produced the following mission statement: “B practises sustainable investment within a healthy ethical and thoughtful culture and strives to achieve customer satisfaction by giving a courteous and efficient service, selling high quality goods at a reasonable price, sourcing goods from local suppliers where possible and causing the least damage possible to the natural environment. By this, we aim to satisfy the expectations of our shareholders by achieving consistent growth in our share price and also to enhance our reputation for being an environmentally responsible company.” Strategic objectives The following objectives have been derived from the mission statement: 1. Build shareholder value through consistent growth in the company’s share price. 2. Increase customer satisfaction ratings to 95% as measured by customer feedback surveys. 3. Increase commitment to local suppliers by working towards achieving 40% of our supplies from sources which are local to where B stores trade. 4. Reduce carbon emissions calculated by internationally agreed measures by at least 1% per year until B becomes totally carbon neutral. 5. Maximise returns to shareholders by employing different generic competitive strategies depending on the market segment in which B stores trade. Financial objectives The Board has set the following financial objectives: 1. Achieve consistent growth in earnings per share of 7% each year. 2. Maintain a dividend pay-out ratio of 50% each year. 3. Gearing levels as measured by long-term debt divided by long-term debt plus equity should not exceed 40% based on book value. Governance The main board comprises the Non-executive Chairman, the Chief Executive and nine Executive directors. These cover the functions of finance, human resources, corporate affairs (including legal and public relations), marketing, planning and procurement. There is also one executive director for each of the three regions, being the Regional Managing Directors of B-Europe, BAsia and B-North America. There are also nine non-executive main board members in addition to the Chairman. The main Board of Directors has separate committees responsible for audit, remuneration, appointments, corporate governance and risk assessment and control. The Risk Assessment and Control Committee’s tasks were formerly included within the Audit Committee’s role. It was agreed by the Board in 2009 that these tasks should be separated out in order not to overload the Audit Committee which has responsibilities to review the probity of the company. B’s expansion has been very rapid in some countries. The expansion has been so rapid that B has not been able to carry out any internal audit activities in some of these countries to date. The regional boards do not have a committee structure. Each of the Regional Managing Directors chairs his or her own Regional Board. All of the Regional Boards have their own directors for finance, human resources, corporate affairs, marketing, planning and procurement but their structure is different for the directors who have responsibility for the stores. In B-Asia, one regional director is responsible for the hypermarkets and supermarkets and another is responsible for discount stores and convenience stores. In BNorth America, one regional director is responsible for the hypermarkets and supermarkets and another is responsible for discount stores (B does not have any convenience stores in North
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America). In B-Europe there is one regional director responsible for supermarkets and hypermarkets, one for discount stores and one for convenience stores. In all regions the regional directors have line accountability to their respective regional managing director and professional accountability to the relevant main board director. There are no non-executive directors on the regional boards. Appendix 1 shows the main board and regional board structures. Treasury Each of B’s three regions has a regional treasury department managed by a regional treasurer who has direct accountability to the respective Regional Director of Finance and professional accountability to the Group Treasurer. The Group Treasurer manages the central corporate treasury department which is located in B’s head office. The Group Treasurer, who is not a main board member, reports to the Director of Finance on the main board. Shareholding, year-end share prices and dividends paid for the last five years B is listed on a major European stock exchange within the eurozone and it wholly owns its subsidiaries. There are five major shareholders of B, including employees taken as a group, which between them hold 25% of the 1,350 million total shares in issue. The major shareholders comprise two long term investment trusts which each owns 4%, a hedge fund owns 5%, employees own 5% and the founding family trust owns 7% of the shares. The remaining 75% of shares are owned by the general public. The year-end share prices and the dividends paid for the last five years were as follows:
Share price at 31 December Net Dividend per share
2007 € 47.38 1.54
2008 € 25.45 1.54
2009 € 28.68 1.54
2010 € 29.44 1.62
2011 € 31.37 1.65
Planning and management control B has a very structured planning process. Each regional board produces a five year strategic plan for its region relating to specific objectives set for it by the main board and submits this to the main board for approval. The main board then produces a consolidated strategic plan for the whole company. This is reviewed on a three yearly cycle and results in a revised and updated group five year plan being produced every three years. B’s management control system, which operates throughout its regions and at head office, is well known in the industry to be bureaucratic and authoritarian. Strict financial authority levels for development purposes are imposed from the main Board. There is tension between the main Board and the regional boards. The regional board members feel that they are not able to manage effectively despite being located much closer to their own regional markets than the members of the main Board. The main Board members, on the other hand, think that they need to exercise tight control because they are remote from the markets. This often stifles planning initiatives within each region. This tension is also felt lower down the organisation as the regional board members exercise strict financial and management control over operational managers in their regions in order to ensure that the main Board directives are carried out. Competitive overview B operates in highly competitive markets for all the products it sells. The characteristics of each of the markets in which it operates are different. For example, there are different planning restrictions applying within each region. In some countries, B is required to operate each of its stores in a partnership arrangement with local enterprises, whereas no such restriction exists within other countries in which it trades. B needs to be aware of different customer tastes and preferences which differ from country to country. The following table provides a break-down of B’s stores in each region.
Supermarkets and hypermarkets Discount stores Convenience stores
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B Europe 3,456 5,168 4,586
4
B Asia 619 380 35
B North America 512 780
Enterprise Strategy
B is one of the largest retailing companies in the world and faces different levels of competition in each region. B’s overall market share in terms of retail sales for all supermarkets, hypermarkets, discount stores and convenience stores in each of its regions is as follows:
Europe Asia North America
Market share 20% 1% 1.5%
The following table shows the sales revenue and net operating profit earned by B in each of its regions for the year ended 31 December 2011:
Revenue Net Operating Profit
B Europe € million 89,899 4,795
B Asia € million 10,105 743
B North America € million 9,708 673
B is constantly seeking other areas of the world into which it can expand, especially within Asia where it perceives many countries have an increasing population and strengthening economies. Corporate Social Responsibility (CSR) B is meeting its CSR obligations by establishing environmental targets for carbon emissions (greenhouse gas emissions), careful monitoring of its supply chain, undertaking sustainable investments and investing in its human capital. Environmental targets for carbon emissions: B’s main board is keen to demonstrate the company’s concern for the environment by pursuing continuous improvement in the reduction of its carbon emissions and by developing ways of increasing sustainability in its trading practices. A number of environmental indicators have been established to provide transparency in B’s overall performance in respect of sustainability. These published measures were verified by B’s statutory auditor and are calculated on a like-for-like basis for the stores in operation over the period measured. In the year ended 31 December 2011, B reduced its consumption of kilowatt hours (kWh) per square metre of sales area as compared with the year ended 31 December 2008 by 9%. The target reduction for that period was 5%. In the same period it reduced the number of free disposable plastic bags provided to customers per square metre of sales area, by 51% against a target of 60%. Its overall greenhouse gas emissions (measured by kilogrammes of carbon dioxide per square metre of sales area) reduced by 1% in 2011 which was exactly on target. B provides funding for the development of local amenity projects in all of the countries where B stores operate. (An amenity project is one which provides benefit to the local population, such as providing a park, community gardens or a swimming pool.) Distribution and sourcing: Distribution from suppliers across such a wide geographical area is an issue for B. While supplies are sourced from the country in which a store is located as much as possible, there is nevertheless still a requirement for transportation across long distances either by road or air. Approximately 20% of the physical quantity of goods sold across the group as a whole are sourced locally, that is within the country in which the goods are sold. These tend to be perishable items such as fruit and vegetables. The remaining 80% of goods are sourced from large international manufacturers and distributors. These tend to be large items such as electrical or electronic equipment which are bought under contracts which are set up by the regional procurement departments. B, due to its size and scope of operations, is able to place orders for goods made to its own specification and packaged as under its own brand label. Some contracts are agreed between manufacturers and the Group Procurement Director for the supply of goods to the whole of the B group world-wide. B’s inventory is rarely transported by rail except within Europe. This has resulted in lower average reductions in carbon emissions per square metre of sales area by stores operated by B-
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Asia and B-North America than for those stores operated by B-Europe. This is because the carbon emission statistics take into account the transportation of goods into B’s stores. Sustainable investments: B aspires to become carbon neutral over the long term. The Board aims to reduce its carbon emissions by investing in state of the art technology in its new store developments and by carrying out modifications to existing stores. Human Resources: B prides itself on the training it provides to its staff. The training of store staff is carried out in store by specialist teams which operate in each country where B trades. In this way, B believes that training is consistent across all of its stores. In some countries, the training is considered to be at a sufficiently high level to be recognised by national training bodies. The average number of training hours per employee in the year ended 31 December 2011 was 17 compared with 13 hours in the year ended 31 December 2010. In 2011, B employed 45% more staff with declared disabilities compared with 2010. Information systems and inventory management In order to operate efficiently, B’s Board has recognised that it must have up-to-date information systems including electronic point of sale (EPOS) systems. An EPOS system uses computers or specialised terminals that can be combined with other hardware such as bar-code readers to accurately capture the sale and adjust the inventory levels within the store. EPOS systems installation is on-going. B has installed EPOS systems in its stores in some countries but not in all its stores world-wide. B’s information systems are not perfect as stock-outs do occur from time-to-time, especially in the European stores. This can be damaging to sales revenue when stock-outs occur during peak sales periods such as the days leading up to a public holiday. In Asia and North America in particular, B’s information technology systems sometimes provide misleading information. This has led to doubts in the minds of some head office staff about just how robust are B’s inventory control systems. As is normal in chain store groups, there is a certain degree of loss through theft by staff and customers. Another way that loss is suffered is through goods which have gone past their “sellby” date and mainly relates to perishable food items which are wasted as they cannot be sold to the public. In most countries, such food items which cannot be sold to the public may be sold to local farmers for animal feed. Regulatory issues B’s subsidiaries in Asia and North America have sometimes experienced governmental regulatory difficulties in some countries which have hindered the installation of improved information systems. To overcome some of these regulatory restrictions, B-Asia and B-North America have, on occasions, resorted to paying inducements to government officials in order for the regulations to be relaxed.
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Regional MD B-Asia
Regional Director* Discount and Convenience stores Regional Treasurer
Regional Finance Director
Regional MD B- N America
Group Treasurer
Finance Director
Corporate Affairs Director
Regional Human Resources Director
Regional Corporate Affairs Director
Regional MD (B-Europe, B-Asia, B-North America)
Human Resources Director
Chief Executive Officer
Chairman (Non- Executive)
Regional Planning Director
Planning Director
Regional Marketing Director
Marketing Director
Regional Procurement Director
Procurement Director
Appendix 1
*Applies to B-Asia only. In B-North America, where there are no Convenience stores, there is a Regional Director responsible for Discount stores as well as the Regional Director responsible for Supermarkets and Hypermarkets. B-Europe’s structure has three Regional Directors responsible for the stores, one each responsible for Supermarkets and Hypermarkets, Discount Stores and Convenience Stores.
Regional Director Supermarkets and Hypermarkets
B Regional Board Structure
Regional MD B-Europe
B Main Board Structure
APPENDIX 2
Extract of B’s income statement and statement of financial position. Income statement for the year ended 31 December 2011 Notes Revenue Operating costs Net operating profit Interest income Finance costs Corporate income tax PROFIT FOR THE YEAR
€ million 109,712 (103,501) 6,211 165 (852) (1,933) 3,591
Statement of financial position as at 31 December 2011 € million ASSETS Non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets
57,502 7,670 1,521 3,847 13,038 70,540
EQUITY AND LIABILITIES Equity Share capital Share premium Retained earnings Total equity
1
Non-current liabilities Long term borrowings Current liabilities Trade and other payables Total liabilities Total equity and liabilities
2,025 3,040 18,954 24,019
15,744 30,777 46,521 70,540
Notes: 1. There are 1,350 million €1.50 shares currently in issue. The share price at 31 December 2011 was €31.37.
End of Pre-seen Material The unseen material begins on page 10
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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 Rationalisation in Country W B’s first venture to open stores outside Europe was in Country W in 1982. Initially, this was very successful but the current business environment is very competitive and the forecast results shown below have prompted questions about the continued viability of B’s business operations in Country W. B's business in Country W is organised into four sectors which cover the four different types of store which it operates there. Each sector has a sector manager who reports to the Regional Managing Director responsible for Country W. The individual store managers report to the sector managers who are senior to them. Table 1: B's forecast sector profit/(loss) for Country W for year ended 31 December 2012 Sector
Revenue Costs Trading Establishment Regional Office Profit/Loss
Supermarkets € million 330
Hypermarkets € million 450
Discount stores € million 300
Convenience stores € million 120
Total
%
€ million 1,200
100
198 33 68 31
243 18 204 (15)
225 30 34 11
72 12 34 2
738 93 340 29
62 8 28 2
Notes: The amounts in Table 1 have been converted from Country W's currency to euros. Trading costs are all variable with revenue. Establishment costs are all variable with revenue. The regional office costs are all fixed. They comprise: Insurances of €35 million Property taxes of €100 million B Supermarkets' management charge of €205 million. This is a central charge imposed by B Supermarkets: its basis is not disclosed to sector managers and it is a non-negotiable charge. The regional office costs are apportioned on the basis of the floor areas of the sector's properties as shown below: Supermarkets % 20
Hypermarkets % 60
Discount stores % 10
Convenience stores % 10
The Regional Managing Director responsible for Country W is very dissatisfied with the forecast sector trading results and considers that the forecast profit of €29 million is unacceptable. The Regional Managing Director responsible for Country W proposes to close the hypermarkets which he believes should improve the profit to €44 million. However, the Sector Manager of Country W's Hypermarkets has argued that: 1.
The current apportionment base of the regional office costs is unfair because these costs are not directly related to floor area but are more closely associated with the revenues generated by each of Country W's four trading sectors;
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2.
In terms of its trading performance, the Hypermarkets sector is Country W's best sector;
3.
If any sector is to be closed, it should be the discount stores and the convenience stores because their combined forecast revenues in the year ended 31 December 2012 is only â‚Ź420 million which is â‚Ź30 million less than the Hypermarkets' revenue;
4.
The regional office costs are too high and they contain a lot of wasteful expenditure: The sectors should not have to pay costs which they do not understand and did not authorise.
Competitive strategy The Regional Managing Director responsible for Country W has attempted to manage B's business in Country W within the spirit of the company's mission statement, particularly 'selling high quality goods at a reasonable price'. However, he realises that this strategy has not been successful for all of the business sectors in Country W. The Sector Manager for Country W's Convenience Stores has commented that 'B's business in Country W is going nowhere: we are stuck in the middle. We should develop different competitive strategies to fit the characteristics of each of our four sectors'. Country W's four sectors have the following characteristics: Sector
B's Brand Characteristics
Customer Characteristics
Product Characteristics
Pricing
Competition
B's Market Share 30%
Supermarkets
Many well sited supermarkets enable B to operate with a very economical cost structure.
Live locally. Value 24 hour opening. Middle income.
Wide variety of food and household goods.
Price sensitive
Two wellestablished national chains each with 10% market share. Their supermarkets are often in inconvenient locations.
Hypermarkets
Very highly regarded. High reputation for quality.
Willing to travel up to 50 miles. Affluent.
Consumer durables, high value items such as televisions, furniture, computers. Many up-market brands some of which are exclusive to B
Customers value quality and are willing to pay a premium for it.
Hypermarkets are a new concept in Country W. Only one recently founded competitor which is trading at a loss.
85%
Discount Stores
Highly regarded for its specialist range of products
Expect prices to be lower than in hypermarket. Mid and lower income groups.
Limited range of branded and 'own branded' goods.
Customers are extremely price sensitive.
Competition is mixed: some is very profitable, innovative and efficient: some is trading at a loss and very badly organised.
15%
Convenience Stores
No clear identity. Some stores are market leaders; others are market laggards.
Live locally. Mid and upper income groups.
Low value items.
Customers will pay a premium price if location convenient.
One national chain which has 65% of the market. Remaining 25% is fragmented.
10%
End of unseen material The requirement for Question One is on page 13 TURN OVER
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Required (a)
(i)
Calculate the forecast sector contribution margins and the forecast total profit or loss for Country W for year ended 31 December 2012. You should assume that: • The Hypermarkets sector is closed on 30 September 2012. • The Hypermarkets sector's costs and revenues accrue equally throughout 2012. (3 marks)
(ii)
Calculate the revised forecast sector profits and forecast total profit for Country W for year ended 31 December 2012. You should assume that: • The regional office costs are allocated on the basis of sector revenue. • The Hypermarkets are not closed. (3 marks)
(b)
Prepare a report evaluating the strategic proposal, made by the Regional Managing Director responsible for Country W, to close the Hypermarkets sector. In your report you should: (i)
Discuss, in turn, each of the four arguments put forward by the Sector Manager for Country W's Hypermarkets. (12 marks)
(ii)
Advise B of the strategic implications that closing the Hypermarkets might have on B's future operations within Country W. (12 marks)
Your report should consider both the financial and non-financial effects of the proposal by the Regional Managing Director responsible for Country W to close the Hypermarkets sector.
(c)
Assume all four sectors of B's business continue in Country W. (i)
Recommend, giving your reasons, which competitive strategy B should follow in future, in each of Country W's business sectors.
You should use Porter's model of generic competitive strategies in your answer. (16 marks) (ii)
Advise B of TWO limitations of Porter's model of generic competitive strategy. (4 marks) (Total marks for Question One = 50 marks)
(Total for Section A = 50 marks)
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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 WWW is an international company based in Europe which trades principally in Asia and Europe. In its published Code of Ethics WWW has committed itself to 'being a company that will trade fairly and sustainably'. WWW has been following an expansion strategy which has led to the following three situations occurring: Situation 1 At a recent presentation to investment analysts and financial journalists, WWW’s Chief Executive Officer (CEO) gave a very optimistic forecast for the company’s future, suggesting that revenue would double over the next three years and profits and dividends would increase by 50%. However, the CEO had prepared his forecast in a hurry and had not had it confirmed by anybody else within WWW. He did not mention that WWW's home Government was considering taking legal action against WWW for underpayment of excise duties and had made a claim for large damages. If this claim was to be successful it would materially affect WWW’s profit in 2013. Situation 2 In connection with the legal case in 1, WWW's home Government had obtained a court order that all documents relating to WWW’s export trade should be made available to the Government's lawyers. However, many of the documents covered by the court order were the subject of confidentiality agreements between WWW and various entrepreneurs. These documents included details of patents and processes with a high commercial value and if knowledge of these became public it would destroy some of WWW’s competitive advantage. Situation 3 This situation, which is unconnected to situations 1 and 2, has also occurred. WWW has a joint venture agreement with a company, ZZZ. Under the terms of the joint venture agreement each company has to make regular returns of financial performance to the other. ZZZ is always late in making its returns, which are usually incomplete and contain many errors. ZZZ's accounting staff are very reluctant to co-operate with WWW’s accounting staff and the working relationship between the two companies is poor. WWW’s financial controller has been involved in a review of the joint venture with ZZZ. Due to the many problems that ZZZ has caused him and his staff he has advised discontinuing the joint venture.
The requirement for Question Two is on the opposite page
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Required (a) Advise, giving your reasons, whether each of the three situations is in conflict with CIMA's Code of Ethics. (i)
Situation 1.
(ii)
Situation 2.
(4 marks) (4 marks) (iii) Situation 3. (4 marks)
(b)
Advise WWW of the stages of a procedure it could use to resolve ethical conflicts. (7 marks)
(c)
Recommend, giving your reasons, TWO current ethical issues, other than those contained in CIMA's Code of Ethics, that could be included in WWW's Ethical Code. (6 marks) (Total for Question Two = 25 marks)
Section B continues on page 18
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Question Three HHH is a UK university. HHH's management board has identified student performance as a Critical Success Factor (CSF). HHH's management board has identified this CSF as it targets an area where it is currently underperforming compared to other UK universities. HHH is aware of a nearby comparable university, SSS, which has had much success when several of its departments have worked together to improve their student performance. SSS has a culture of sharing knowledge and a knowledge management strategy. HHH does not have a culture of knowledge sharing. Within HHH, knowledge is regarded as the personal property of the individual and very few of its staff are prepared to share their knowledge with any of their colleagues. HHH has an abnormally high level of staff turnover compared to other universities. It is twice as high as that of SSS. Student performance Student performance is measured by HHH as the number of students successfully completing their courses. Those students who do not successfully complete their course are described as 'drop-outs'. The number of drop-outs is measured by the drop-out rate. HHH has access to data for all UK universities for student drop-out rates analysed by age and gender. Drop-out rates vary greatly across HHH's academic departments. In some academic departments the drop-out rate is extremely high; in others it is very low, much better than the national average. Where the drop-out rate is much better than the national average, the departments have operated extensive schemes for student support. For example, students with personal problems can seek help from trained counsellors, students with financial problems have been helped to find part-time work and students with academic problems are given extra individual tuition from the academic staff. In the departments where the drop-out rates are extremely high, none of these student support schemes is operating. The departments with the extremely high drop-out rates are not aware of how the departments with the very low drop-out rates support their students. The departments with the very low drop-out rates are unwilling to share their knowledge about how to reduce the drop-out rates as they have spent considerable time and effort developing their schemes and regard these as their own property. HHH has not conducted any systematic analysis into its overall drop-out rate. Within its information systems, HHH has the following information about each of its students: • • • • • • •
Name Age Gender Address Educational record prior to joining HHH Educational record within HHH Academic department
HHH is aware that many universities have successfully used data mining to assist them in managing student performance.
The requirement for Question Three is on the opposite page
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Required (a)
Many organisations integrate their CSFs into their performance management systems by converting them to Key Performance Indicators (KPIs). Explain, using examples, the advantages that HHH would gain by doing the same. (3 marks)
(b)
(c)
Advise HHH's management board: (i)
of THREE benefits the university and its staff could expect to receive from the successful implementation of a knowledge management strategy. (6 marks)
(ii)
of a total of FOUR social and technical problems HHH might encounter in operating a knowledge management system. (8 marks)
Explain data mining and how the outputs of the analysis could be used by HHH to improve the student drop-out rates. (8 marks) (Total for Question Three = 25 marks)
Section B continues on page 20
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Question Four BBB is a fashion retailer with a chain of 20 shops, each with its own manager. BBB believes it can best compete by offering a wide selection of high quality products sold at a reasonable price. BBB has trained all its staff in customer care and prefers to employ staff who have worked for other fashion retailers. As a large proportion of BBB's products are clothes which only remain fashionable for a short period, it is important that good inventory control is maintained. BBB has recently invested in a robotic system to improve materials handling in its warehouse. As a service to its customers, BBB will deliver to their home, within 24 hours, any items bought from one of its shops. BBB's competitors do not offer such a service. BBB knows that it has demanding customers who appreciate the retail experience and after sales service which BBB offers. If a customer has any dissatisfaction with a purchase, BBB will make a refund without question. BBB frequently sends its regular customers special offers and invites them to fashion shows held in its shops. BBB’s head office is organised into departments which are responsible for the procurement of products, setting of personnel policies, investigating innovations in fashion retailing and general corporate administration. BBB’s management accountant has been investigating the acquisition of high-tech ‘Smart Tills’ which would provide the following information for each shop: • • • • •
Sales transactions and analysis Staff statistics (sales per staff member) Gross profit Inventory turnover and balances Audit information (a database recording all transactions)
If BBB replaces its existing tills with Smart Tills, it will be able to better manage cash and inventory and optimise its sales due to accurate real time information. This will have the benefits of identifying and controlling wastage and improve the accuracy of its forecasts. The overall advantages offered by the Smart Tills are that BBB will be able to react more quickly to customer demand, ensure that it has sufficient stock in its shops, minimise wastage, reduce its investment in working capital and enable its head office to know, on a real-time basis, how well each of its shops is trading.
The requirement for Question Four is on the opposite page
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Required (a)
Explain how BBB could use Porter's Value Chain to achieve competitive advantage. Your answer should give examples from BBB of the NINE activities in the value chain and explain how each one of them could add value for BBB. (13 marks)
(b)
Advise BBB how it could improve its profits by use of Smart Tills. (4 marks)
(c)
Recommend FOUR key stages that BBB should include in a plan to introduce Smart Tills into all its shops. (8 marks) (Total for Question Four = 25 marks)
End of Question Paper
Maths Tables and Formulae are on Pages 23 and 24
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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
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
Enterprise Strategy
Interest rates (r) 3% 4% 5% 6% 0.971 0.962 0.952 0.943 0.925 0.907 0.915 0.889 0.864 0.888 0.855 0.823 0.863 0.822 0.784 0.837 0.790 0.746 0.813 0.760 0.711 0.789 0.731 0.677 0.766 0.703 0.645 0.744 0.676 0.614 0.722 0.650 0.585 0.701 0.625 0.557 0.681 0.601 0.530 0.661 0.577 0.505 0.642 0.555 0.481 0.623 0.534 0.458 0.605 0.513 0.436 0.587 0.494 0.416 0.570 0.475 0.396 0.554 0.456 0.377
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
14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073
7% 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
Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051
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8% 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
9% 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
10% 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
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
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
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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
Interest rates (r) 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
4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590
Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
5% 0.952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462
6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 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
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
Interest rates (r) 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
14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623
15% 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259
16% 0.862 1.605 2.246 2.798 3.274 3.685 4.039 4.344 4.607 4.833 5.029 5.197 5.342 5.468 5.575 5.668 5.749 5.818 5.877 5.929
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
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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb. LEARNING OBJECTIVE 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.
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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
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Enterprise Pillar
Strategic Level Paper
E3 – Enterprise Strategy
September 2012
Thursday Session
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