ICAP Practice KIt Business Management & Startegy PDF

2015
BUSINESS MANAGEMENT
AND STRATEGY
PRACTICE KIT
CFAP - 3
ICAP
Practice Kit
Business management and strategy

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Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Certified finance and accounting professional
C
Contents
Page
Question and Answers Index v
Section A Questions 1
Section B Answers 59
Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

I
Index to questions and answers

Question Answer
page page
Chapter 1 - Strategy, stakeholders and mission

1.1 Mission Statement I 1 59
1.2 Mission Statement II 1 59
1.3 Decision Making Process 2 60
1.4 Vision and Mission Statements 2 61
1.5 Short-Termism 2 61
1.6 Fine Sugar Mills 3 61
1.7 Formal Business Strategy 3 62
1.8 Innovative Strategy 3 63
1.9 Power-Interest Matrix 3 64
Chapter 2 Environment analysis
2.1 Foreign Direct Investments and 4 65
Political Risk
2.2 Political Risk 4 65
2.3 Japanese Exports 4 66
2.4 Pestel Model 4 66
2.5 Aviation and Pestel Analysis 5 67
2.6 Porters Diamond 5 68
2.7 Network Solutions Pestel Analysis 5 69
Chapter 3 Competitive forces
3.1 Lifecycle I 7 74
3.2 Lifecycle II 7 74
3.3 Lifecycle III 7 75
3.4 Lifecycle IV 7 76
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3.5 Competitive Forces 8 76

3.6 Exit Barriers 8 77
3.7 Boston Consulting Group Matrix I 8 77
3.8 Boston Consulting Group Matrix II 9 78
3.9 Porters Five Forces Model 9 79
3.10 Five Forces Model of Competition 9 80
3.11 Rail Segments 10 81
3.12 Market Segmentation 10 81
Chapter 4 Internal analysis
4.1 Benchmarking 11 82
4.2 Added Value I 11 82
4.3 Added Value II 11 82
4.4 Value Chain 11 83
4.5 Modelling, Measuring, Targeting 11 84
4.6 Core Competence 12 84
4.7 Swot Analysis I 12 85
4.8 Swot Analysis II 13 86
4.9 Swot Analysis III 13 86
Chapter 5 Competitive advantage
5.1 Franchising 15 87
5.2 International Alliances 15 87
5.3 Competitive Strategies 15 88
5.4 Differentiation Strategy 16 88
5.5 Collaboration 16 89
5.6 Sustainable Competitive Advantage 16 89
5.7 Porters Generic Strategies 16 89
5.8 Market Niche 16 90
Chapter 6 Methods of development
6.1 Expansion Strategies 17 91
6.2 Market Penetration Strategy 17 92
6.3 Growth Strategies 17 92
6.4 Mergers and Acquisitions 17 93
6.5 Divestment Strategy and 18 93
Benchmarking
6.6 Product Market Strategies 18 95
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6.7 Suitability, Acceptability and 19 96

Feasibility
6.8 Smile-Sweet 19 96
6.9 Environment Management Society 20 96
6.10 Licensing 21 99
6.11 Scenario Planning 21 99
Chapter 7 Strategy implementation
7.1 Centralised Decision Making I 22 100
7.2 Centralised Decision Making Ii 22 100
7.3 Centralised Decision Making III 22 101
7.4 Strategy Formulation and Strategy 22 101
Implementation
7.5 Achieving Goals 23 102
7.6 Downsizing 23 102
7.7 Change Management I 23 103
7.8 Change Management II 23 104
7.9 Change Management III 24 104
7.10 Outsourcing 25 106
7.11 Centralised Cash Management 25 107
Chapter 8 Finance, R&D and marketing strategies
8.1 Sponsored Events 26 108
8.2 Globalisation 26 108
8.3 Packaging 26 109
8.4 Brand Equity and Pull Strategy 26 109
8.5 Penetration and Segmentation 27 110
8.6 Skimming and Penetration Strategies 27 110
8.7 Marketing Mix 27 111
8.8 Global Capabilities 28 111
8.9 Channels of Distribution 28 112
8.10 Research and Development Strategy 28 113
8.11 Market Research 28 114
8.12 Global vs. Domestic Business 29 114
Strategy
8.13 Lifecycle Marketing 29 114
8.14 Process of Globalisation 29 116
8.15 Overseas Manufacturing 29 116
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8.16 Marketing Intelligence 29 117

Chapter 9 Operations strategy
9.1 Cost Economies 30 118
9.2 Forward Integration 30 118
9.3 Alpha Equipments 30 119
9.4 NKL Electronic Services 30 119
Chapter 10 IT strategy
10.1 Systems 33 123
10.2 IT, Porter and Globalisation 33 124
10.3 Customer-Oriented Website 33 125
10.4 E-Marketing Mix 33 125
10.5 Customer Relationship Management 33 127
10.6 Intranet 34 128
10.7 Marketing and Selling Channels 34 129
10.8 Curtain-up 34 130
Chapter 11 Recruitment
11.1 Internal Promotion and Transfer 35 131
11.2 Hiring 35 131
11.3 Qualities of Recruiter and Job Ad 35 132
11.4 Critical Skills and Competencies 36 133
11.5 Recruitment and Selection Process 36 133
11.6 Application Forms 36 134
11.7 Ineffective Interviews 36 134
11.8 Human Resources Plan 36 134
11.9 Employee Turnover 36 135
Chapter 12 Training and development
12.1 Personal Development Plan 37 136
12.2 Service-Oriented Success 37 136
12.3 Apollo Engineering 37 137
12.4 Training and Development 38 138
12.5 Analysis and Redesign 38 138
Chapter 13 Appraisals and working environment
13.1 Health and Safety 39 139
13.2 Labour Welfare Policies 39 139
13.3 Apollo Mining 39 140
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13.4 Human Resource Management I 40 140

13.5 Human Resource Management II 40 141
13.6 Stress 40 142
13.7 Employee Compensation 41 143
13.8 Health and Safety 41 144
13.9 Senior HRM 41 144
13.10 Teepee ltd 41 145
13.11 Evaluation 42 148
13.12 Abilities 42 148
Chapter 14 Strategic performance measurement
14.1 Performance Indicators 43 149
14.2 Critical Success Factors 43 149
14.3 Objective Evaluation 43 150
14.4 Non-Financial Performance Indicators 44 150
14.5 Balanced Scorecard 44 151
14.6 Key Success Factors 44 152
Chapter 15 Project management
15.1 Miscellaneous Terms 45 153
15.2 Quality, Time, Cost and The 45 153
Accountant
15.3 Project Planning 45 154
15.4 Project Monitoring and Review 45 155
Chapter 16 Identifying and assessing risk
16.1 Reputation Risk 46 156
16.2 Technology Risk 46 156
16.3 Liquidity Risk 46 157
16.4 Market Risk and Derivatives Risk 46 157
16.5 Risk Management 46 158
16.6 Managing Credit Risk 47 159
16.7 Risk Map and Risk Dashboard 47 160
16.8 Cranage Company 47 161
16.9 JPX 49 163
16.10 Pingo PLC 50 166
Chapter 17 Controlling risk
17.1 Risk Management Approach 52 169
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17.2 Risk Management Review 52 169

17.3 Risk Model 52 170
17.4 Risk Culture 52 170
17.5 Risk Management and Audit 52 171
Chapter 18 Business and professional ethics
18.1 Code of Ethics 53 173
18.2 Dental Equipments Ltd 53 173
18.3 Fundamental Principle 53 174
18.4 Public Interest 53 174
18.5 Business and Professional Ethics 53 175
18.6 Significance of Business Ethics 53 175
Chapter 19 Conflicts of interest and ethical conflict resolution
19.1 Workshop 54 176
19.2 Martha 54 177
19.3 Objectivity 55 178
19.4 Code of Professional Ethics 55 178
19.5 Venal Foods 55 179
Chapter 20 Corporate social responsibility and sustainability
20.1 Progressive Corporate Social 56 180
Responsibility
20.2 Excel Chemicals 56 180
20.3 Austerity and CSR 56 181
20.4 Environmental Footprint 56 182
20.5 Sustainability Reporting 56 182
20.6 Socially Responsible Investment 57 183
20.7 Corporate Social Responsibility 57 185
20.8 CSR and Environmental Strategy 57 185
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A
SECTION
Questions
CHAPTER 1 - STRATEGY, STAKEHOLDERS AND MISSION
1.1 MISSION STATEMENT I

East-West Centre of Diabetes (EWCD), a non-profit organization has recently
received substantial donations from a group of overseas Pakistani
philanthropists. EWCD has ambitious plans to develop the institution into an
absolutely world-class research and teaching university-cum-hospital in the
country. The Hospital would provide infrastructure facilities and medical care by
a team of highly reputable consultants. It is envisaged to provide treatment for
diabetes which is growing at an alarming rate and adversely affecting the health
of a large segment of the population in all age groups. The University would
also help to produce qualified doctors who would specialise in the treatment of
patients suffering from this highly debilitating disease.
Required
Prepare a Mission Statement for EWCD stating its purpose and identifying its
core values. The Mission Statement should be brief, simple and clearly highlight
the important purpose, intent and aspirations of EWCD.
1.2 MISSION STATEMENT II

(a) A low-cost airline FastPlane has published its mission statement on its
website:
To provide our customers with safe, good value, point-to-point services.
To effect and to offer reliable and consistent product and fares agreeable to
business and leisure markets on a range of European routes. To achieve
this, we will develop our staff and establish long-term relationships with our
key suppliers.
Required
State the purpose of a mission statement, and suggest how the mission
statement of FastPlane meets this purpose.
(b) The Royal Institute of British Cake-makers (RIBC) is a professional
association for cake makers in the UK. Its mission statement is as follows:
Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

To advance cake making by demonstrating benefit to society and

promoting excellence in the profession.
The RIBC was concerned about the lack of understanding amongst the
general public about the benefits of good cake making. It was also
concerned that the standards of professional ability amongst chefs might
not be as high as it should be, and that public criticisms of some new types
of cake were possibly justified.
The RIBC identified a number of strategic objectives, consistent with its
mission statement.
Required
On the basis of this information, suggest three strategic objectives that the
RIBC might have identified, that are consistent with its mission statement.
1.3 DECISION MAKING PROCESS

(a) Narrate important points that should be considered in the decision making
process.
(b) Union Group of Companies has diversified interests in fertilizer, sugar,
cement and steel industries. Each entity operates as a strategic business
unit and executives in the individual companies have powers to take all
decisions at the operational level and only limited decisions at the
tactical level. The Group Management Team which monitors and controls
the performance of the different strategic business units has retained for
itself the powers to make all strategic decisions.
Required
Describe the distinguishing features of decision making process at
Operating, Tactical and Strategic levels.
1.4 VISION AND MISSION STATEMENTS

(a) What are the distinctive ingredients of Vision and Mission Statements?
(b) It has been observed that certain companies adopt, with minor
modifications and changes in emphasis, the basic ingredients of Vision
and Mission Statements of the more successful rival companies in an
attempt to achieve similar results.
Required
Describe the drawbacks of adopting such an approach in formulation of
Vision and Mission Statements.
1.5 SHORT-TERMISM
(a) Why missionoriented business strategists do not view the Short-
termism approach favourably?
(b) Give two examples of typical business situations to highlight the defects of
pursuing a policy of short-termism.

Questions
1.6 FINE SUGAR MILLS

Fine Sugar Mills Limited (FSML) owns and operates a sugar cane crushing
plant for manufacture of refined sugar. The affairs of FSML are looked after by a
team of professional management and the company ranks third amongst all the
sugar mills in the country in terms of its sales and profitability. The Company
has developed an extensive network of growers spread over a wide area who
deliver cane at the factory site which is then crushed in the minimum possible
time to achieve high rates of sucrose recoveries.
Required
Identify the key stakeholders of FSML and explain briefly why you consider
each of these constituent stakeholders to be of vital importance for the
sustainable and long-term profitable operations of the Company.
1.7 FORMAL BUSINESS STRATEGY

Management has to expend considerable efforts in devising business strategies
to achieve corporate objectives and goals effectively.
(a) Why do companies accord importance to the pursuance of a formal
Strategic Planning Process?
(b) Explain the different steps which the management has to undertake in the
formulation and implementation of a well-considered business strategy.
1.8 INNOVATIVE STRATEGY

Highly Creative Strategic Planners in progressive organizations have innovative
mindsets and do not merely project past strategies in the future but are
continuously engaged in out of the box thinking to explore new opportunities
beyond the existing strategy framework.
Required
Identify the distinguishing characteristics of organizations which pursue
innovative corporate strategies.
1.9 POWER-INTEREST MATRIX

Required
(a) Describe Mendelows power-interest matrix.
(b) Identify factors that may give substantial power to a stakeholder or a group
of stakeholders in an entity, who are either inside or external to the entity.
(c) Suggest how the power-interest matrix may be used by the management of
an entity as an aid to implementing a strategic change.

CHAPTER 2 ENVIRONMENT ANALYSIS
2.1 FOREIGN D I R E C T INVESTMENTS AND POLITICAL RISK

Competition for attracting direct foreign investments among countries has
always been intense. Countries such as Singapore, Malaysia and Cyprus have
been able to satisfactorily fulfil the requirements of the foreign investors and
achieve significant growth through these investments. However, a large
number of third world countries have not been so successful in attracting direct
foreign investments mainly due to the high level of Political Risks perceived by
the prospective investors.
Required
(a) Explain what is meant by the term Political Risk in the above context.
(b) What are the different types of Political Risks which have to be
considered by a prospective investor while evaluating opportunities of
direct foreign investment in a third world country?
2.2 POLITICAL RISK

(a) Accurate Engineering Limited is a company located in Europe and is
engaged in the business of manufacturing a wide range of high precision
metallurgical components for the automobile, medical equipment and
miscellaneous engineering industries. The Companys customers are
sensitive to quality and require components conforming to most stringent
tolerance standards. The Company is presently incurring high labour
costs and is considering a proposal to locate a portion of its facilities in
Asia to achieve cost economies.
Required
Narrate at least six different types of Political Risks which should be
considered by Accurate Engineering Limited while evaluating an
investment involving substantial capital with long-term implications.
2.3 JAPANESE EXPORTS

(a) In your opinion what important factors have led leading Japanese
companies to establish automobile assembling/manufacturing plants in
selected developing countries?
Identify five factors and substantiate them with brief explanations.
(b) Describe briefly the Political Factors which should be taken into
consideration by a multinational corporation while evaluating a decision to
make substantial direct investment in a foreign country.
2.4 PESTEL MODEL

(a) Identify a model that can be used to carry out a strategic position analysis
of the industry in which an entity operates.
(b) PESTEL is a model for carrying out a position analysis of the environment
within which an entity operates. What does PESTEL stand for?

Questions
(c) There are several global oil companies, such as Exxon Mobil and BP plc.
Use the PESTEL model to identify environmental factors that will affect the
strategic planning of such companies.
2.5 AVIATION AND PESTEL ANALYSIS

Use PESTEL analysis to identify the environmental factors that might affect the
strategic planning for a major international airline.
2.6 PORTERS DIAMOND

Porters diamond is used to analyse regional and national competitiveness.
(a) In the context of regional and national competitiveness, explain the
meaning of a cluster.
(b) Describe five determinants of regional or national competitiveness in
Porters diamond model.
(c) A region in Country Y has strong international competitiveness in
environmental industries. These are industries specialising in
environmental technology, such as air pollution control, water and waste
water management, waste management and recycling, energy
management and renewable energy, cleaner technologies and processes,
and environmental consulting services.
Using the determinants of regional competitiveness in Porters diamond
model as general headings, list 10 factors that might be contributing to the
international competitive advantage in environmental industries that this
region of Country X enjoys
2.7 NETWORK SOLUTIONS PESTEL ANALYSIS

Introduction
Network Solutions (NS) is a privately owned high technology company
established in 2002 by computer engineer, Kevin Testa. It is situated in the
country of Redland, a prosperous developed nation with a stable well established
political system. Successive governments in Redland have promoted technology
by providing grants and tax incentives. Tax credits are also provided to offset
company investment in research and development. The government, like many
governments worldwide, have invested heavily in a national telecommunications
infrastructure. However, in 20X4 the country suffered an economic downturn that
led many companies to postpone technological investment.
By 20X4 NS employed 75 full-time employees in a new, purpose-built factory and
office unit. These employees were a mixture of technically qualified engineers,
working in research and development (R&D), factory staff manufacturing and
assembling products and a small sales and service support team.
Product areas
In 20X4, NS had three distinct product/service areas data communication
components, network management systems and, finally, technical support.
NS sells data communication components to original equipment manufacturers
(OEMs), who use these components in their hardware. Both the OEMs and their
customers are predominantly large international companies. NS has established
a good reputation for the quality and performance of its components, which are
competitively priced. However, NS has less than 1% of the domestic marketplace

and faces competition from over twenty significant suppliers, most of who also
compete internationally. Furthermore, one of the companys OEM customers
accounts for 40% of its sales in this area.
The international market for data communication components had increased from
Rs.3.3 trillion in 20W1 to Rs.8.1 trillion in 20X4. Forecasts for 20X5 and beyond
predict growth from increased sales to currently installed networks rather than
from the installation of new networks.
The maturity of the technology means that product lifecycles are becoming
shorter. Success comes from producing high volumes of reliable components at
relatively low prices. NS produces components in a relatively prosperous country
where there is significant legislation defining maximum work hours and minimum
wage rates. All new components have to be approved by an appropriate
government approval body in each country that NS supplies. This approval
process is both costly and time consuming.
The second product area is network management systems. NS originally
supplied fault detection systems to a small number of large end-users such as
banks, public utility providers and global manufacturers. NS recognised the
unique requirements of each customer and so it customised its product to meet
specific needs and requirements. They pioneered a modular design which
allowed customers to adapt standard system modules to fit their exact networking
requirements. The success of their product led to it being awarded a prestigious
government technology award for technological innovation in data
communications. This further enhanced the companys reputation and enabled it
to become a successful niche player in a relatively low volume market with gross
margins in excess of 40%. They only have two or three competitors in this
specialist market. Unlike component manufacture, there is no requirement to
seek government approval for new network products.
Finally, the complexity of NS products means that technical support is a third key
business area. It has an excellent reputation for this support. However, it is
increasingly difficult and costly to maintain the required level of support because
the company does not have a geographically distributed network of support
engineers. All technical support is provided from its headquarters. This contrasts
with the national and international support services of their large competitors.
Current issues
NS currently manufacture 40% of the components used in its products. The rest
of the components, including semiconductors and microprocessors, are bought in
from a few selected global suppliers. Serious production problems have resulted
from periodic component shortages, creating significant delays in manufacturing,
assembly and customer deliveries.
NS is still a relatively immature organisation. There are small functional
departments for sales and marketing, technical research and development,
manufacturing and procurement. Kevin still personally undertakes all staff
recruitment and staff development. He is finding the recruitment of high calibre
staff a problem, with NS small size and geographical location making it difficult to
attract the key personnel necessary for future growth.
Required
(a) Evaluate the macro-environment of NS using a PESTEL analysis.
(b) Analyse the competitive environment that NS is competing in.

Questions
CHAPTER 3 COMPETITIVE FORCES
3.1 LIFECYCLE I
It is widely realised that companies pass through various stages of growth
during the different periods of their existence.
Required
State four dominant characteristics which would be apparent in a company which
is in:
(a) the start-up or initial stage of its business;
(b) the rapid and dynamic growth stage of its existing business.
3.2 LIFECYCLE II
Strategists involved in the marketing of Fast Moving Consumer Goods (FMCG)
keep a close watch on the various stages of the Life Cycle of their products and
adjust their strategies accordingly.
Required
List the type of marketing-mix strategies of Products, Pricing, Distribution and
Sales Promotion which should be pursued to meet the requirements of the
products which are in the introduction, growth, maturity and decline stages of
their product life cycle.
3.3 LIFECYCLE III

Horizon Limited (HL) is engaged in the business of manufacturing and marketing
of a wide range of consumer durable products. The companys products are in
different stages of their Product Life Cycles. Consequently, HL pursues
different promotional strategies for products depending on the stage of their
Product Life Cycles.
Required
State the types of Promotional Strategies which HL may pursue for marketing of
its wide range of products in the (i) Introduction, (ii) Growth, (iii) Maturity and (iv)
Declining stages of their Product Life Cycle.
3.4 LIFE CYCLE IV

(a) A typical product life cycle has four main phases: introduction, growth,
maturity and decline. Twelve products are listed below. Match these
products to the stage they have arguably reached in their life cycle, by
filling in the following table.
Products:
Portable DVD players
Fax messaging
(Hand-written) postcards
Personal identity cards using iris-based technology
E-mails
Credit cards

Personal computers
Fourth generation (4G) mobile telephones
Cheque books
Typewriters
Smart cards (in banking)
E-conferencing
3D printers
Driverless cars
Introduction Growth Maturity Decline
(b) Identify a product or service whose life cycle has not conformed to the
traditional pattern of introduction, growth, maturity and decline.
3.5 COMPETITIVE FORCES

(a) Identify and explain briefly six factors which have contributed to the
significant increase in importance of International Trade in the preceding 3-4
decades.
(b) According to Michael Porter the nature of competitiveness in any industry
is a composite of Five Forces. The Competitive Analysis model developed
by Porter is widely followed for formulating business strategies in many
industries. List the five Competitive Forces stated by Michael Porter.
3.6 EXIT BARRIERS

List and explain briefly four factors which in your opinion create Exit
Barriers and prevent existing participants from quitting a loss-incurring industry.
3.7 BOSTON CONSULTING GROUP MATRIX I

According to the Boston Consulting Group Matrix, business organisations which
have multi-divisions and compete in different industries pursue separate
strategies for their various business divisions. The BCG Matrix describes the
characteristics of the markets and the relative competitive position of the various
business divisions as Stars, Cash Cows and Dogs.
Required
Explain the distinctive characteristics of each of these types of business divisions
in terms of their relative market positions. Also mention the types of business
strategies which should be pursued by each of these types of business divisions.

Questions
3.8 BOSTON CONSULTING GROUP MATRIX II

Required
(a) Describe the Boston Consulting Group (BCG) matrix.
(b) Explain the product-market strategy that might be chosen for products in
each quadrant of the matrix.
(c) Identify two weaknesses of the BCG matrix as a model for strategic
analysis.
3.9 PORTERS FIVE FORCES MODEL

(a) Explain the purpose of using Porters five forces model.
(b) List the five forces in the model.
(c) For each of these five forces, list four factors that could affect the strength
of the force.
3.10 FIVE FORCES MODEL OF COMPETITION

(a) Identify the force of competition which is relevant in the context of
Michael Porters Five Forces Model of Competition in each of the
scenarios presented below. Substantiate your answer by highlighting the
salient features of the Model of Competition selected by you in each of
these scenarios.
(i) Four companies of similar size and strength are engaged in the
manufacture of detergent powder for washing clothes. These
companies are key market players and jointly share 95% of the
aggregate market which is not expected to witness any significant
growth in the foreseeable future.
(ii) Soundhealth Pharmaceuticals and Goodcare Pharmaceuticals are
manufacturers of two new medicines for treatment of cancer. The
medicines have been developed after a long period of research at a
very substantial R&D cost and are highly effective.
Both the existing manufacturers are earning exceptionally high
profits in a market which is expected to witness growth in the future.
(iii) Lucky Coal Mines Limited is the sole supplier of coal to a cement
plant located in close proximity to the mines. The cement plant
requires substantial quantities of coal for firing of its kilns. Quality of
this coal is most suitable for the cement plant and also cost- effective
due to low transportation costs. Lucky Coal Mines has several buyers
who are willing to purchase the coal because of its high calorific value.
(b) Unique Textile Mills are leaders in the designing and manufacturing of
cotton fabrics for ladies fashion clothing. Identify four Strategic Objectives
which in your opinion may be included in the strategic planning process of
Unique Textile Mills.

3.11 RAIL SEGMENTS

The purpose of market segmentation is to divide a market into different sections,
each with a distinctive group of potential customers. A segmentation strategy is
then developed, and a different marketing mix is used to market a product to
each segment.
Typically a different price is charged for the product in each segment, but it may
be necessary to vary the product offered to each segment of the market, in order
to meet the needs of customers in that segment.
Required
Suggest ways in which a railway company might segment its market for rail
travel.
3.12 MARKET SEGMENTATION

A tuition company provides a range of tuition services and educational
publications to students preparing for professional accountancy examinations.
Required
Suggest ways in which the tuition company might segment its market for teaching
services and products.

Questions
CHAPTER 4 INTERNAL ANALYSIS
4.1 BENCHMARKING
Required
(a) What is the purpose of benchmarking?
(b) Describe the nature of:
(i) Internal benchmarking
(ii) Competitor benchmarking (or competitive benchmarking)
(iii) Operational benchmarking (also called process benchmarking and
activity benchmarking)
(iv) Customer benchmarking
4.2 ADDED VALUE I

(a) Define added value.
(b) Suggest how a strategy for adding value might be developed.
4.3 ADDED VALUE II

About ten years ago, the owners of a small dairy farm producing milk and cream
switched to organic farming methods and making organic dairy products milk,
cream, cheese, yoghurt and ice cream. They sell their branded products through
three distributors in the region. In addition, they use direct marketing to sell some
cheeses as expensively-packaged gift products. Catalogues are sent to potential
customers by e-mail, customers buy the products online and they are then
delivered direct to the customer.
The owners of the farm believe that their success has been due to their ability to
add value for their customers.
Required
Suggest how the farm may have succeeded in adding value for its customers.
4.4 VALUE CHAIN

(a) List the primary activities and secondary activities in a value chain.
(b) Explain the significance of the value chain for business strategy.
(c) Identify the primary activities in the value chain for a publisher of
educational text books.
(d) Identify the primary activities in the value chain for a company selling
insurance policies (such as car insurance) by telephone.
4.5 MODELLING, MEASURING, TARGETING

Required
(a) Identify a model or techniques that you might use to carry out:
(i) an analysis of an entity and its activities
(ii) an environmental analysis

(iii) an industry analysis

(iv) a strategic position analysis
(v) an analysis of a strategy for change
(b) What measures might you use to assess the effectiveness of marketing?
(c) The Mayor of Capital City wants to improve the road traffic situation in the
city by reducing traffic congestion. At the moment, there are frequent traffic
jams and transport times through the city are very slow. The Mayor is
particularly concerned about delays to public transport services (buses) and
taxis.
He is discussing with his Road Management Committee a strategy to
reduce traffic congestion in the city.
(i) Suggest two critical success factors (CSFs) that might be used for
developing the strategies to reduce road congestion.
(ii) Suggest two strategies for achieving success in these areas.
(iii) For each critical success factor, suggest a key performance
indicator (KPI) for setting a measurable target of performance, and
comparing actual results against the target.
4.6 CORE COMPETENCE

(a) Define a core competence, and describe the factors that create a core
competence.
(b) For any two successful major companies that you know, identify and
explain what you consider to be their core competence (or core
competencies).
(c) Explain the significance of core competencies for product-market business
strategy.
4.7 SWOT ANALYSIS I

The Righton Supermarkets Group is the largest supermarket group in the
country. In spite of a decline in total consumer spending in the national economy
last year, spending in the supermarket sector as a whole increased, and Righton
also increased its market share. It now has over 20% of the market for food-and-
drink shopping in the country. It is also enjoying strong growth in the sale of non-
food products such as clothing (it has its own brand of fashion clothes) and
domestic electrical goods.
The group has just announced record annual profits, and investors expect the
growth in profitability to continue, in spite of signs of weakness in the national
economy.
Rival supermarket groups have been attempting to regain lost market share. Two
rival groups merged a year ago. Another competitor was acquired a few years
ago by a major US supermarket group and is pursuing an aggressive competitive
strategy.
Rightons success is due partly to its reputation for low prices and reasonable-
quality products, and its efficient in-store service.
The group continues to acquire land and to purchase retail property with the
intention of building more out-of-town stores and smaller in-town convenience

Questions
stores. It does not have any business operations outside the country. There is
some concern about the possibility of government action to prevent the group
from exploiting its near-monopoly position in the market.
Required
(a) What is the purpose of SWOT analysis?
(b) Using the information provided, carry out a SWOT analysis for the Righton
Supermarket Group.
4.8 SWOT ANALYSIS II

The AZ Group is one of the worlds leading pharmaceuticals companies. It was
created five years ago by the merger of Entity A with Entity Z. The groups
operations are based mainly in Western Europe and North America. The North
American market currently accounts for 40% of world sales for pharmaceutical
companies.
In the past two or three years, AZ has been involved in clinical trials in countries
in South America and Asia, aimed at developing new medicinal drugs. These
countries were selected because regulatory controls over medical research are
less stringent than in the US, Canada or Western Europe.
The group has suffered some setbacks in its business in the past twelve months:
(1) There have been serious concerns among the public and the medical
profession about the safety of one of AZs most successful drugs, Carora.
(2) A new drug developed by AZ failed to obtain regulatory approval in the US.
Approval is needed from the national regulator before it can be sold in the
market.
(3) Another new drug that AZ has been developing has had disappointing
clinical trials. Clinical trials are carried out before further testing and
application to the national regulators for approval.
R&D spending accounts for a substantial proportion of total annual expenditure of
the AZ Group (and other pharmaceutical companies).
Required
(a) Using the information provided, carry out a SWOT analysis for the AZ
Group.
(b) Suggest a strategy that the AZ Group might pursue as a way of developing
and growing its business in the future.
4.9 SWOT ANALYSIS III

ABC is a multinational company specialising in travel goods such as suitcases
and travel bags. It has a strong position in the luxury goods section of the
market, and its brand is well-known and highly-regarded.
It has manufacturing facilities and distribution centres located around the world.
Its IS/IT systems strategy has been to allow decentralisation of systems. Each
division of the company has been allowed to develop and use its own IS/IT
systems.
The company has been successful in using developments in information
technology. It has EDI links with many of its major suppliers, and it was one of
the first companies in the industry to develop a website for advertising and selling

its goods directly to consumers. However, the popularity of the website has been
falling, and the number of hits per day is now down to a third of its peak level
about three years ago.
Although the company has EDI links with suppliers, it does not yet have similar
arrangements with its major customers. However, some customers have recently
suggested that improvements could be made in their supply chain by establishing
extranet links.
The company is in a highly-competitive market, and rival companies have been
successful in taking market share by offering well-designed products at lower
prices.
The directors of ABC are aware that some managers have ideas for improving
competitiveness, but these ideas are spread out throughout the company, and it
has been difficult for different divisions in different countries to exchange their
ideas. It has been suggested that a new intranet system could be introduced to
improve the interchange of ideas within the group.
The directors are also aware that they do not have as much information as they
would like about their competitors. Travel goods are a type of fashion accessory
for many customers, and ABC would probably benefit from learning much faster
about the initiatives that its competitors are taking in the market. It has been
suggested that an information system should be developed for senior managers,
giving them access to information about competitors, including easy access to
their internet sites.
Required
Construct a simple SWOT analysis (strengths, weaknesses, opportunities and
threats analysis) for ABC.

Questions
CHAPTER 5 COMPETITIVE ADVANTAGE
5.1 FRANCHISING
The sponsors of Seaside Resorts Limited (SRL) are considering setting up a
major project on the sea coast at a distance of 85 kilometres east of Karachi.
The project would have facilities of guest houses, swimming pools, golf courses,
tennis and squash courts and scuba diving. It would also have modern facilities
of conference rooms and auditoriums for holding business meetings, training
courses, conferences and symposia.
This first-of-its-kind project in Pakistan would involve substantial capital
investment and also require well-planned physical facilities and selection of
state-of-the-art specialised equipment. A cadre of highly trained and dedicated
work force having diversified skills would be crucial for the successful operations
of the project. The sponsors who were seized with these overwhelming problems
were considering acquiring the services of an expatriate executive to implement
this project and operate it in the initial years. However, the uncertainties
associated with the hiring of an individual on contract basis and entrusting him
with such far-reaching authorities and responsibilities was a source of grave
apprehension for the sponsors.
In the meantime, Oriental Resorts Inc., a Thailand-based company with
experience of managing of similar high profile luxury resort projects in several
far-eastern countries has approached SRL and offered to provide guidance and
expertise for implementation and operation of the proposed project under a
franchise arrangement.
Required
Explain what is a Franchise Arrangement? Also identify four advantages that
would accrue to SRL by entering into a Franchise Arrangement with Oriental
Resorts Inc.
5.2 INTERNATIONAL ALLIANCES

(a) Lazzat Foods Limited is engaged in the business of manufacture of
packaged masalas, jellies and jams. The Companys sales have been
stagnant since the past two years due to intense competition and
aggressive promotion by the competitors in the domestic market. The
Management has proposed to explore new markets abroad and has
suggested that the Company consider participation in a Trade Fair to be
held in Colombo.
Give four advantages which are expected to be achieved by the
Companys participation in the Trade Fair.
(b) State six reasons why companies enter into international alliances.
Give two examples of industries in which international alliances are
most common and identify a logical reason for such an alliance.
5.3 COMPETITIVE STRATEGIES

Although Strategies of Cost Leadership and Product/Service Differentiation
appear to be highly attractive, many companies are often not able to achieve
much success because they lack the necessary capabilities to implement these
strategies successfully.

Required
(a) Explain what you understand by the term Cost Leadership Strategy.
(b) What is meant by Product/Service Differentiation Strategy?

(c) In your opinion what kind of capabilities are of crucial importance for the
successful implementation of a Product/Service Differentiation Strategy?
5.4 DIFFERENTIATION STRATEGY

(i) Briefly explain what is meant by a Differentiation Strategy.
(ii) List six types of skills and resources which are critical for the pursuance
of a successful Differentiation Strategy.
5.5 COLLABORATION
Rival firms may sometimes collaborate with each other, or might choose to avoid
being strongly competitive.
Describe three ways in which rival firms may collaborate.
5.6 SUSTAINABLE COMPETITIVE ADVANTAGE

Suggest how a company might seek to achieve a sustainable competitive
advantage in its markets.
5.7 PORTERS GENERIC STRATEGIES

For each of the three generic strategies identified by Porter, give an example of a
company (or companies) that pursue such a strategy.
5.8 MARKET NICHE

The Western Isles Tourist Board is a government-funded body responsible for
promoting and developing tourism in its region of the country. The tourism
industry has been restricted in the past by unpredictable weather in the summer
and cold winters. The Board governors have agreed that in order to increase the
number of tourists coming to the region, it is essential to attract businesses that
will provide services and facilities, such as activity centres and hotels.
To create interest in tourism-related businesses, the Board has decided that it
should identify niche markets in the tourism industry that might be developed in
the Western Isles. By identifying niche markets, the Board governors hope that
they will start to attract more businesses that will specialise in catering for
particular types of tourist.
Required
Suggest and briefly explain the market niches that might exist for tourism
businesses in the region.

Questions
CHAPTER 6 METHODS OF DEVELOPMENT
6.1 EXPANSION STRATEGIES

Companies which seek expansion of business can achieve their objectives
either through organic/internal expansion or by pursuing acquisition strategies.
(a) Explain the key differences between strategies of expansion by
organic/internal growth and by acquisition.
(b) Give any four reasons why organizations generally prefer to achieve
expansion through internal growth and not through policies of acquisition.
6.2 MARKET PENETRATION STRATEGY

Dandy Candies Limited (DCL) are manufacturers of a wide range of chocolates,
candies and sweets catering primarily to the market segment comprising of
children in the age group of 6-15 years. DCLs products are well accepted in
the market in Karachi and its adjoining metropolitan areas and two of its main
brands are quite popular in the middle class segment of the market.
The management has now realised that in spite of substantial capital
investment in fixed assets and good quality of its products, DCL has not been
able to exploit the full potential of the rapidly growing size of the market and
achieve high level of operating capacity.
The Board has recently appointed a new Marketing Director and has given him a
target to increase DCLs annual sales from the current level of Rs. 600 million
approximately in each of the preceding 2 years to Rs. 1200 million in the next 3
years. Achievement of this target would launch DCL in the league of key market
players and also significantly increase its profitability. The incoming Marketing
Director has a track record of good performance in the consumer goods
industry and achieving high sales targets by pursuing aggressive marketing
policies through deep insight of the market dynamics. The Marketing Director is
confident that he would be able to achieve the sales target set by the Board of
DCL.
Required
Briefly explain the Marketing Penetration Strategies which the Marketing
Director should pursue to achieve the sales target set by the Board.
6.3 GROWTH STRATEGIES

Explain briefly the following types of Growth Strategies pursued by Business
Organisations. Give one example of each of these types of strategies.
(a) Horizontal Integration Strategy
(b) Forward Integration Strategy
(c) Conglomerate Growth Strategy
6.4 MERGERS AND ACQUISITIONS

In the past two decades a number of Mergers and Acquisitions have been
witnessed between some of the most prestigious and financially strong
international corporations in a wide range of businesses such as pharmaceutical
and automobile manufacturing companies, financial institutions, supermarkets,
etc.

Required
Narrate the principal objectives behind the mergers and acquisitions of
companies which are considered to be financially sound and well-established in
their own spheres of business.
6.5 DIVESTMENT STRATEGY AND BENCHMARKING

Granville Holdings plc is a large international consumer goods company
specialising in household cleaning products and toiletries. It has many
manufacturing and sales facilities throughout the world. Over several years it has
offered an increasingly wide range of products appealing to differing market
segments based on both socio-demographic and geographical criteria. However,
this product spread has not only resulted in increased sales volume, but
production, marketing and distribution costs have also increased
disproportionately. Granvilles costs are now about 20% higher than those of its
nearest competitors. In such a competitive market, it is difficult to pass on these
extra costs to the customer.
In order to regain a competitive position, Chris Button, the Managing Director of
Granville Holdings, has been advised to reduce the range of products and the
product lines. Advisors have suggested that a cut back in the product mix by
about 20% could increase profits by at least 40%. Reed is keen to implement
such a product divestment strategy, but he fears that this cutting back could
alienate customers. He needs to know which products need to be removed and
which products are important to the survival of the company. He is unhappy
about the overall performance of his company's activities. Benchmarking has
been recommended as a method of assessing how his companys performance
compares with that of his competitors.
Required
(a) Using appropriate analytical models, discuss how Chris Button might select
the products to be removed from the portfolio as part of his product
divestment strategy.
(b) Examine how benchmarking can be carried out and discuss its limitations.
6.6 PRODUCT MARKET STRATEGIES

Green Tile Company specialises in roof repairs and new roofing. It operates in
the North Town area of a major city. The company has been successful. The
success is due largely to growing market demand for new and better roofing, due
to the increasing regularity of strong winds and gales at various times of the year.
The company has two owner-managers, Stan and Oliver, who want to grow the
business organically. They are considering several strategies for doing this.
The following information is relevant to their strategic thinking:
(1) The companys market share of the business for new roofs and roof repairs
in North Town is estimated to be 25%.
(2) There is a strong local demand for the installation of new, improved satellite
dishes that have recently been introduced to the market. These are
attached to roofs of houses and other buildings.
(3) Stans sister works for the company. She has been talking to a friend, who
has told her about a severe shortage of firms that provide office cleaning
services in the North Town area. She used to work as an administration
manager in an office cleaning firm in a different part of the city.

Questions
Required
Four different product-market strategies are market penetration, product
penetration, market development and diversification. Suggest a product-market
strategy for each of these four categories that Green Tile Company could select
as a way of developing its business. Justify your answers.
6.7 SUITABILITY, ACCEPTABILITY AND FEASIBILITY

When an entity is considering its strategic options, it may be faced with a choice
between several alternative options. These options should be compared and
evaluated, in order to select the one that seems the most suitable. Johnson and
Scholes suggest that alternative strategies should be compared according to
their:
Suitability;
Acceptability; and
Feasibility.
Required
Explain the meaning of the suitability, acceptability and feasibility of strategies.
6.8 SMILE-SWEET
Smile-sweet is the worlds only producer of a sugar sweetener called sucralose,
which it sells under a well-established brand name. Smile-sweet has maintained
its monopoly in the market for sucralose by enforcing its patents over the
production process for the product. These patents have about 15 years left
before they expire.
There is a rapid growth in the demand for sucralose. Demand grew by over 60%
last year, and the entity currently has insufficient production capacity to meet all
the demand. Supplies to customers are therefore rationed. Smile-sweet is
investing in an increase in its production capacity, by expanding facilities in its
existing production plant and opening a new production facility in another country
where labour costs are lower.
The huge success of sucralose is caused by the growing concerns of the public
about obesity, and the preference of many consumers for sweeteners rather than
sugar. In addition unlike other sweeteners, sucralose is a versatile product that
can be used in the production of other consumer items, such as soft drinks,
cakes, yoghurts and cereals.
A US competitor has announced that it is exploring the possibility of developing a
rival sucralose product that would not breach the patent rights of Smile-sweet,
and that it will hope to have a product on the market in about five years time.
Required
(a) Identify and briefly explain the stage in the product life cycle that sucralose
has reached.
(b) Assuming that the US competitor does not enter the market sooner,
suggest what will happen in the market for sucralose when the patents of
Smile-sweet eventually expire, and why.
(c) Suggest and explain strategies that Smile-sweet could pursue in order to
maintain its dominance of the highly-profitable market for sucralose.

6.9 ENVIRONMENT MANAGEMENT SOCIETY

The Environment Management Society (EMS) was established in 1999 by
environment practitioners who felt that environmental management and audit
should have its own qualification. EMS has its own Board who report to a Council
of eight members. Policy is made by the Board and ratified by Council. EMS is
registered as a private limited entity.
EMS employs staff to administer its qualification and to provide services to its
members. The qualification began as one certificate, developed by the original
founding members of the Society. It has since been developed, by members and
officers of the EMS, into a four certificate scheme leading to a Diploma. EMS
employs a full-time chief examiner who is responsible for setting the certificate
examinations which take place monthly in training centres throughout the
country. No examinations are currently held in other countries.
If candidates pass all four papers they can undertake an oral Diploma
examination. If they pass this oral they are eligible to become members. All
examinations are open-book one hour examinations, preceded by 15 minutes
reading time. At a recent meeting, EMS Council rejected the concept of
computer-based assessment. They felt that competence in this area was best
assessed by written examination answers.
Candidate numbers for the qualification have fallen dramatically in the last two
years. The Board of EMS has concluded that this drop reflects the maturing
marketplace in the country. Many people who were practitioners in environmental
management and audit when the qualification was introduced have now gained
their Diploma. The stream of new candidates and hence members is relatively
small.
Consequently, the EMS Board has suggested that they should now look to attract
international candidates and it has targeted countries where environmental
management and audit is becoming more important. It is now formulating a
strategy to launch the qualification in India, China and Russia.
However, any strategy has to recognise that both the EMS Board and the Council
are very cautious and notably risk averse. EMS is only confident about its
technical capability within a restricted definition of environmental management
and audit. Attempts to look at complementary qualification areas (such as soil
and water conservation) have been swiftly rejected by Council as being non-core
areas and therefore outside the scope of their expertise.
Required
Internal development, acquisitions and strategic alliances are three development
methods by which an organisations strategic direction can be pursued.
(a) Explain the principles of internal development and discuss how appropriate
this development method is to EMS.
(b) Explain the principles of acquisitions and discuss how appropriate this
development method is to EMS.
(c) Explain the principles of strategic alliances and discuss how appropriate
this development method is to EMS.

Questions
6.10 LICENSING
Some companies enter into licensing arrangements with the overseas
companies as an alternative to direct exporting.
Required
Identify the advantages that such companies seek to achieve by following this
strategy.
6.11 SCENARIO PLANNING

Explain what is meant by Scenario Planning.

CHAPTER 7 STRATEGY IMPLEMENTATION
7.1 CENTRALISED DECISION MAKING I

Tameer Construction Company, a UAE-based entity, has ambitious plans to
develop major real estate projects in Pakistan through a subsidiary company.
The parent companys principal office in Dubai is largely managed by expatriate
executives who are committed to a policy of highly centralised control of the
Companys financial resources and are reluctant to delegate financial powers to
the overseas subsidiary.
Required
As the Chief Executive Officer of the subsidiary, you are required to advise the
parent company of the disadvantages of pursuing a highly centralised financial
policy. Identify four disadvantages of pursuing such a centralised policy.
7.2 CENTRALISED DECISION MAKING II

A multinational company which has its headquarters in the UK pursues a
strategy of exercising very close control and centralization of all important
decision-making processes of all of its four overseas subsidiary companies.
Required
Identify four factors which in your opinion may have influenced the MNCs
strategy of implementing highly centralised decision making policies for its
subsidiary companies.
7.3 CENTRALISED DECISION MAKING III

A Multinational Corporation (MNC) has subsidiaries in several developing
countries with majority shareholdings in each of them. The MNC pursues a policy
of centralised financial decision making and the subsidiary companies are
required to retain only minimum balances to meet their immediate operating
requirements and transfer surplus funds to the parent company.
Required
List various advantages the MNC seeks to achieve by pursing such a centralised
financial decision making policy.
7.4 STRATEGY FORMULATION AND STRATEGY IMPLEMENTATION

Pan Pacific Steel Mills Limited was established in 1960 to manufacture steel
products such as iron bars, wire rods, girders and steel sheets. In 2006, a team
of professional management assumed charge of the Companys operations. The
new management team made ambitious plans to increase the rated capacity,
diversify the product-mix and upgrade the quality of the products to bring the
Companys operations at par with the leading players in the countrys steel
industry. In spite of formulation of Corporate and Business Strategy on sound
lines by the multi-disciplinary management team, the Company is experiencing
serious problems in achieving its objectives due to lack of cohesion between the
formulation of strategic plans and their actual implementation.
Required
(a) Explain the relationship between Strategy Formulation and Strategy
Implementation.

Questions
(b) What essential elements should the management of Pan Pacific Steel Mills
Limited consider for creating an environment of good relationship between
Strategy Formulation and Strategy Implementation?
7.5 ACHIEVING GOALS

Strategic Planning and Management is an exercise undertaken at the highest
levels of the management hierarchy and involves decisions concerning
formulation, implementation and evaluation of cross-functional activities which
would enable an organization to achieve its stated objectives. In spite of the
cumulative skills and considerable experience of the senior management team, it
has been observed that a number of organizations are not able to achieve
significant success and the actual performance often falls short of the set goals.
Required
Explain the key factors, which in your opinion, are responsible for the
managements inability to achieve all of the goals envisaged in the Strategic
Plans.
7.6 DOWNSIZING
Symco Bank Limited has introduced significant changes in its organizational
structure and downsized its operations so that it may be able to provide more
efficient services to its customers and meet intense competition from other banks.
Required
(a) Define Downsizing and very briefly describe its impact on the Banks
organizational structure.
(b) List the important considerations which should be kept in perspective by the
HR Manager of the bank while pursuing a policy of downsizing.
7.7 CHANGE MANAGEMENT I

Research in a number of organisational settings shows that efforts to introduce
major changes for achieving the objectives of corporate turn-around and
improvements invariably meet with strong resistance from employees at various
levels.
Required
Identify the reasons why employees offer strong resistance to major
organisational changes and prefer to continue with the existing status.
7.8 CHANGE MANAGEMENT II

A manufacturing company produces engineering items to the specifications of its
customers, and each customer order is treated as a unique job. A customer order
is taken by a sales representative. It is then processed in an order processing
department. Each job goes through three stages of manufacturing: cutting,
grinding and assembly. The despatch department is then responsible for
delivering the finished item to the customer.
The companys management were aware that the company was losing a large
amount of potential business to rival companies, who were able to achieve a
much shorter lead time in processing orders, manufacture and delivery to
customers.

The company therefore called in some BPR consultants, who recommended that
the company should restructure its order fulfilment process. The manufacturing
operations should be restructured. Instead of having three separate departments
for cutting, grinding and assembly, workers should be grouped into multi-skilled
teams, each equipped with its own machines and tools for all three stages of
production. Customer orders should be assigned to a team whose leader would
be responsible for completing the job to the required quality standards in the
fastest time possible. In addition, order processing and delivery should be
combined into an order fulfilment operation. The individual responsible for
processing a customer order should remain responsible for arranging the
production work, chasing progress of the job and arranging delivery of the
finished item to the customer.
The companys management have accepted the recommendations of the
consultants. However, they are aware that the changes will meet strong
resistance from many employees, especially production workers who will be
required to become multi-skilled. There may also be resistance from employees
who will become order fulfilment managers and made responsible for the lead
times for jobs.
Required
(a) Using a model of your choice, suggest how a firm of change consultants
might assist the company in planning and implementing the changes.
(b) Explain the meaning of internal marketing and its relevance to change
management.
7.9 CHANGE MANAGEMENT III

Feathers Theatre is located in a large commuter town 30 miles from Lahore.
David Manning has recently been appointed as the new chief executive with a
brief to improve attendances, which have fallen to their lowest level ever in recent
years, with some shows only one-third full. He has put together a plan that will
hopefully improve the current situation.
It is apparent that the differences in opinions held by the theatre stakeholders
e.g. actors, the local council and the theatre volunteers who help out with the
running will present problems to management and in particular to David
Manning. He will have to initiate change within the theatre if the required
solutions are to be introduced. This will be neither welcome nor easy to
implement.
Required
(a) Examine why the different parties might resist the introduction of new
objectives and new operations.
(b) David Manning will need to provide leadership if he is to be successful in
introducing change. Discuss the key attributes he will need if he is to be a
successful change agent.

Questions
7.10 OUTSOURCING
Superb Engineering Limited (SEL) manufactures parts and components for
assembly/manufacture of automobiles. During the past few years, the company
has witnessed phenomenal growth in its product lines and sales revenues have
registered significant growth. However, the overall profitability has not shown a
corresponding increase. SEL considers that a substantial proportion of the efforts
and energies of the management and staff at various levels are expended in
handling a very wide range of diversified activities. SEL is, therefore, examining
the feasibility of outsourcing certain activities of its operations to outside parties.
Required
Identify four advantages and disadvantages each of Business Process
Outsourcing in the above situation for SEL.
7.11 CENTRALISED CASH MANAGEMENT

Multinational Corporations (MNCs) which have widely dispersed operations in
several countries often prefer to centralise their cash management functions
and conduct all their major cash operations from pools located in internationally
recognised financial centres. This policy requires each subsidiary to retain
minimum cash for its own transaction purposes and remit all excess funds to a
central cash depository.
Required
Explain the advantages which MNCs seek to achieve through centralised cash
management policies and pooling of all excess cash balances at prominent
international financial centres.

CHAPTER 8 FINANCE, R&D AND MARKETING STRATEGIES
8.1 SPONSORED EVENTS

Companies which pursue market-driven business strategies consider that
sponsorship of high profile and attractive events are communication techniques
to create awareness and affiliation of their companies and brands with the target
market. These companies enter into agreements and provide financial and non-
financial support for social, cultural, literary and sports events to a group,
organization or an individual celebrity in anticipation of creation of a lasting
awareness of the companys name or its brand among the audience.
Sponsorship by leading companies, as a promotional alternative, has gained
world-wide prominence in recent years.
Required
Briefly describe six main objectives which are envisaged to be achieved through
sponsorship of such high profile and attractive events?
8.2 GLOBALISATION
In the preceding five decades, a significant number of companies have
pursued well- conceived strategies of Globalisation in order to seize the immense
business opportunities by operating on a worldwide basis. These companies
have achieved notable success in the expansion of their business globally and
have manufacturing facilities and marketing networks spread in several countries.
Required
State and briefly explain six significant objectives of multinational companies in
pursuing policies of Globalisation.
8.3 PACKAGING
List and explain briefly any four important packaging features which would
influence the decision of a consumer to purchase an edible consumer product.
8.4 BRAND EQUITY AND PULL STRATEGY

(a) Explain the meaning of Brand Equity.
(b) Silkfinish Paints Limited (SPL) are manufacturers of a wide variety of
superior quality paints which are used in interior and exterior finishing of
residential, commercial and industrial buildings. SPL intends to launch an
aggressive Pull Strategy to counter competition from new entrants who
are offering lucrative margins to the retailers to promote their products
which are inferior in quality and priced much below the prices of SPLs
products.
(i) What is meant by Pull Strategy?
(ii) Explain briefly what advantages SPL is seeking to achieve by
launching an aggressive Pull Strategy.

Questions
8.5 PENETRATION AND SEGMENTATION

(a) What is Market Penetration Policy? Identify the conditions in which
Market Penetration Policy may be pursued to achieve optimum results.
(b) Explain briefly what you understand by the term Market Segmentation.
State the criteria which are essential for classification of markets in
different segments.
8.6 SKIMMING AND PENETRATION STRATEGIES

(a) Foresight Electronics is a knowledge-based company and is known for its
ability to manufacture innovative and new-to-the-market electronic products
and sell them in specifically identified niche markets. The company
follows a Market Skimming Strategy to achieve its profitability objectives.
Required
Narrate four conditions which are essential for Foresight Electronics to be
able to successfully adopt its Market Skimming strategy.
(b) Household Furniture Co. are manufacturers of a wide range of furniture
products used primarily by customers in the middle income group.
Required
Identify four different types of conditions in which it would be
advantageous for the firm to pursue Market Penetration Strategy.
8.7 MARKETING MIX

Consumer Products are classified by marketers in different categories as follows:
(i) Convenience Products detergents, packaged milk, newspapers, soft drinks,
etc.
(ii) Shopping Products readymade clothes, furniture, carpets, shoes, etc.
(iii) Speciality Products televisions, refrigerators, branded watches, etc.
The marketing mix of each category of Consumer Products comprises of the
following ingredients:
Price Customer Buying Behaviour
expensive less frequent purchase/keen
comparison of price, quality and style
low price special purchase effort/brand loyalty
high price frequent purchase/less planning
Distribution Promotion
distribution in few outlets producer/resellers
widespread distribution mass promotion/advertising by
at convenient locations producer
outlets in specialised carefully targeted promotion by
markets/shopping malls producer/resellers
Required
Identify the most appropriate characteristics of each ingredient of the marketing
mix for the above categories of Consumer Products.

8.8 GLOBAL CAPABILITIES

All leading global business organisations possess certain distinctive capabilities
and competitive advantages which set them apart from those companies whose
operations are confined within their limited geographical areas.
Required
Describe at least six core capabilities which are observed in leading global
organisations regardless of their special lines of business.
8.9 CHANNELS OF DISTRIBUTION

Gabriel Finn recently graduated from the College of Fashion. Until he has
established his own business, he is working in the offices of a supermarket
group, where he is highly regarded by his managers.
Gabriel is keen to exploit a market opportunity that he has identified for making
fashionable hats. He believes that there is a strong potential demand for
fashionable headwear, and he believes that he has the ability to design and
manufacture a successful range of products. He has been given capital by his
family to set up the business, and he is confident that he has the financial
resources to establish the design and manufacturing side of the business.
He is aware that in order to establish the business, he must find a route to
market for his products. He is considering three possibilities:
(1) Reaching an agreement with the supermarket group where he works to sell
the products through its supermarkets, using the own-label clothing brand
of the supermarket group.
(2) Creating a brand for the products, and selling them through a number of
independent fashion stores in the area.
(3) Creating a brand for the products, and marketing and selling them through
a website and the internet.
Gabriel can choose only one of these options.
Required
(a) What are the advantages and disadvantages of each channel of
distribution, and what might be the implications of using each channel for
Gabriels business?
(b) Explain briefly how the marketing mix will probably differ for each of the
marketing and distribution channels that Gabriel is considering.
8.10 RESEARCH AND DEVELOPMENT STRATEGY

Some companies invest heavily in research and development. What are the
difficulties in carrying out a financial assessment of R&D strategy and how can
they be overcome?
8.11 MARKET RESEARCH

(a) What is meant by Market Research?
(b) Give four basic reasons why companies conduct market research.

Questions
8.12 GLOBAL VS. DOMESTIC BUSINESS STRATEGY

Distinguish between a global business strategy and a multi-domestic/adaptive
business strategy. Identify a real life example of each strategy and give reason for
your choice.
8.13 LIFECYCLE MARKETING

(a) List the 4Ps of the marketing mix.
(b) Suggest how the 4Ps of the marketing mix might differ for a consumer
product in each of the four stages of the products life cycle by completing
the following table:
Stage of life cycle Suitable marketing mix
Introduction
Growth
Maturity
Decline
8.14 PROCESS OF GLOBALISATION

Give five reasons why the process of Globalisation has assumed great
importance in the present business environment.
8.15 OVERSEAS MANUFACTURING

Paragon Polyester Company Limited (PPCL), a Korean company, is
considering a proposal for a substantial investment to establish a polyester plant
in a foreign country. PPCL has considerable technology and expertise in its
particular line of business which is available in only a few countries. PPCL is
examining the pros and cons of setting the project as a wholly-owned subsidiary
company or entering into a joint venture with one of the local entrepreneurs.
Required
In your opinion, what are the distinctive advantages and disadvantages of
undertaking overseas manufacturing operations through a wholly-owned
subsidiary company?
8.16 MARKETING INTELLIGENCE

In highly competitive business environments dominated by relatively few equally
powerful players, the participants make concerted efforts to implement effective
Marketing Intelligence Systems.
(i) What is meant by the term Marketing Intelligence System?
(ii) List five different sources which help in the creation of an effective
Marketing Intelligence System.

CHAPTER 9 OPERATIONS STRATEGY
9.1 COST ECONOMIES

In the current economic scenario, business organizations are under continuous
stress to achieve economies in their production and operating costs. The
pressures for cost reduction emanate from the management as well as the
competitors and customers.
Required
Identify eight operational and strategic areas which must be scanned
continuously by an industry leader to achieve cost economies and maintain its
competitive advantage.
9.2 FORWARD INTEGRATION

Red Balloon Clothing Limited (RBCL) is engaged in the business of
manufacturing a wide range of children clothing since the past six years. The
Company has built a reputation for good quality products of latest designs and
its brand name is very popular in the middle class segment of the market. The
Company strongly believes in a policy of giving value for the customers
money. At present, RBCL markets its products through a widely dispersed
network of independent retailers who sell the companys brands along with the
products of other manufacturers.
RBCL is considering a proposal of forward integration and establishing its own
chain of retail outlets for sale of its products. RBCL would however, continue to
sell its products through the network of existing retailers also.
Required
Identify and explain briefly the different factors which RBCL should examine
while evaluating the proposal for establishing its own network of retail outlets.
9.3 ALPHA EQUIPMENTS

Alpha Equipments is a Taiwanese manufacturer of various types of
photocopiers and has recently decided to export its products to Pakistan.
Alpha Equipments is considering appointing a Single Distributor in Pakistan who
would represent the exporter and would be responsible for the entire marketing
operations in this country.
Required
State six different advantages that Alpha Equipments would achieve through
the appointment of a Single Distributor for import and distribution of its products in
Pakistan.
9.4 NKL ELECTRONIC SERVICES

NKL Electronic Services operates in a high labour cost environment in Western
Europe and imports electronic products from the Republic of Korea. It re-brands
and re-packages them as NKL products and then sells them to business and
domestic customers in the local geographical region. Its only current source of
supply is ESAS electronics based in a factory on the outskirts of Seoul, the
capital of the Republic of Korea. NKL regularly places orders for ESAS products
through the ESAS web-site and pays for them by credit card. As soon as the

Questions
payment is confirmed ESAS automatically e-mails NKL a confirmation of order,

an order reference number and likely shipping date. When the order is actually
despatched, ESAS send NKL a notice of despatch e-mail and a container
reference number. ESAS currently organises all the shipping of the products. The
products are sent in containers and then trans-shipped to EIF, the logistics
company used by ESAS to distribute its products. EIF then delivers the products
to the NKL factory. Once they arrive, they are quality inspected and products that
pass the inspection are re-branded as NKL products (by adding appropriate
logos) and packaged in specially fabricated NKL boxes. These products are then
stored ready for sale. All customer sales are from stock. Products that fail the
inspection are returned to ESAS.
Currently 60% of sales are made to domestic customers and 40% to business
customers. Most domestic customers pick up their products from NKL and set
them up themselves. In contrast, most business customers ask NKL to set up the
electronic equipment at their offices, for which NKL makes a small charge. NKL
currently advertises its products in local and regional newspapers. NKL also has
a web site which provides product details. Potential customers can enquire about
the specification and availability of products through an e-mail facility in the web
site. NKL then e-mails an appropriate response directly to the person making the
enquiry. Payment for products cannot currently be made through the web site.
Feedback from existing customers suggests that they particularly value the
installation and support offered by the company. The company employs specialist
technicians who (for a fee) will install equipment in both homes and offices. They
will also come out and troubleshoot problems with equipment that is still under
warranty. NKL also offer a helpline and a back to base facility for customers
whose products are out of warranty. Feedback from current customers suggests
that this support is highly valued. One commented that it contrasts favourably
with your large customers who offer support through impersonal off-shore call
centres and a time-consuming returns policy. Customers can also pay for
technicians to come on-site to sort out problems with out-of-warranty equipment.
NKL now plans to increase their product range and market share. It plans to grow
from its current turnover of Rs.50m per annum to Rs.120m per annum in two
years time. David Masood, the owner of NKL, believes that NKL must change its
business model if it is to achieve this growth. He believes that these changes will
also have to tackle problems associated with
Missing, or potentially missing shipments. Shipments can only be tracked
through contacting the shipment account holder, ESAS, and on occasions
they have been reluctant or unable to help. The trans-shipment to EIF has
also caused problems and this has usually been identified as the point
where goods have been lost. ESAS does not appear to be able to reliably
track the relationship between the container shipment and the Waybills
used in the EIF system.
The likely delivery dates of orders, the progress of orders and the progress
of shipments is poorly specified and monitored. Hence deliveries are
relatively unpredictable and this can cause congestion problems in the
delivery bay.
David also recognises that growth will mean that the company has to sell more
products outside its region and the technical installation and support so valued by
local customers will be difficult to maintain. He is also adamant that NKL will
continue to import only fully configured products. It is not interested in importing
components and assembling them. NKL also does not wish to build or invest in
assembly plants overseas or to commit to a long-term contract with one supplier.

Required
(a) Draw the primary activities of NKL on a value chain. Comment on the
significance of each of these activities and the value that they offer to
customers.
(b) Explain how NKL might re-structure its upstream supply chain to achieve
the growth required by NKL and to tackle the problems that David Masood
has identified.
(c) Explain how NKL might re-structure its downstream supply chain to achieve
the growth required.

Questions
CHAPTER 10 IT STRATEGY
10.1 SYSTEMS
Required
Explain the following terms and give an example of each:
(a) Decision support system
(b) Expert system
(c) Executive information system
(d) e-commerce
(e) e-business
10.2 IT, PORTER AND GLOBALISATION

Required
(a) Use Porters five forces model to analyse the impact of the internet on
competitive markets.
(b) Explain how e-commerce has helped lower the barriers to globalisation
faced by companies.
10.3 CUSTOMER-ORIENTED WEBSITE

Describe the key features that are essential in the design of a successful
customer-oriented website for a supplier of home furniture and furnishings.
10.4 E-MARKETING MIX

In addition to planning an e-marketing strategy in terms of the traditional 7Ps
marketing mix, an e-marketing mix can also be considered in terms of the 6Is.
Required
List and briefly describe each of the 6Is of the e-marketing mix.
10.5 CUSTOMER RELATIONSHIP MANAGEMENT

(a) Briefly describe the objectives of customer relationship management and
summarise the key elements of how this is achieved in practice.
Business organisations rely on IT systems to function. For example, accounting
and performance management systems are often computerised, and likely
contain large amounts of confidential data. Computer systems need to be kept
secure from errors, breakdown, unauthorised access and corruption. Maintaining
system security, even for small home computers linked to the internet, is a
permanent problem and the risks must be managed continually.
Required
(b) List and briefly explain the major risks to IT systems that may prevent them
achieving their objectives.

10.6 INTRANET
DGB Ltd is a large importer of homecare products; the head office supports
seven area branches which are spread out over a large geographical area. Each
of the area offices is run fairly autonomously, each office having its own
management team including IT support personnel. DGB sells its entire range of
products through third party dealers.
The rating awarded to a dealer determines which categories of products they are
able to sell. Head office sets the dealers rating and prices, but leaves the daily
interaction with dealers to the area management; there is a pre-set upper and
lower limit per item. The price ranges are reviewed quarterly and any changes in
prices are faxed or emailed to the branches following the review. This allows for
local price bargaining and price setting; individual targets are set annually for
each area. Salaries and bonuses depend on meeting and beating these targets.
Currently each DGB area office and warehouse supports and supplies its own
dealers with the required products. When inventories become low they place a
Required Stock Form (RSF) with head office. On receipt of the RSF, head office
despatch the goods from their central warehouse to the appropriate area office.
When the central warehouse becomes low on any particular item(s), DGB will
raise purchase orders and send them to one of their many international suppliers.
Typically, each area office has its own inventory recording system, running on
locally networked personal computer systems (PCs). RSFs are e-mailed to head
office.
Required
(a) Describe the major characteristic and benefits of an intranet.
(b) Assess the impact of implementing an intranet across the head office and
branches. Assume that DGB is going to maintain its current physical
structure (i.e. central office and seven branches).
10.7 MARKETING AND SELLING CHANNELS

The internet and e-commerce have become important channels for marketing
and selling, and the internet can also be a distribution channel for electronic
products.
Required
List the potential benefits of the internet and e-commerce for:
(a) suppliers
(b) customers
10.8 CURTAIN-UP
Suggest how electronic marketing could be used by theatre companies.

Questions
CHAPTER 11 RECRUITMENT
11.1 INTERNAL PROMOTION AND TRANSFER

New Age Automobile Company Limited intends to diversify its operations by
establishing a separate division for manufacture of a less-expensive brand of
tractors. The tractors would be used primarily by agriculturists having small farm-
holdings. The Management is contemplating whether to promote personnel from
the automobile division for certain middle-level technical positions in the tractor
division and induct new entry level personnel in the automobile division, or
alternatively recruit foremen level personnel from external sources for the tractor
division by advertising for the positions in the news media.
Required
Narrate and explain briefly the advantages and disadvantages of internal
promotion and transfer of foremen level personnel for the tractor division from the
automobile division.
11.2 HIRING
You have been entrusted with the task of hiring an individual for the position of
General Manager Marketing for Good Health Dairies Limited. The company has
been established recently and is in the process of establishing marketing
network for distribution of its products throughout the country.
Required
Identify and explain briefly, what kinds of managerial competencies you would
examine and seek in the prospective candidates for the position.
11.3 QUALITIES OF RECRUITER AND JOB AD

(a) Recruitment of the right type of staff is of critical importance for the short
term as well as the long-term success of an organisation. Induction of
unsuitable employees creates difficulties for an organization in the
achievement of its goals, undermines the morale of other employees and
has adverse effects on the individuals themselves as they are misfit and
unable to make worthwhile contribution towards the organization.
Required
Briefly describe qualities that a skilled recruiter should possess in order to
be able to evaluate prospective candidates for recruitment in a
performanceoriented organization.
(b) A leading hospital which has a network of facilities at several locations in
Karachi and also in other cities intends to invite applications for the posts of
Laboratory Technicians at its various facilities.
Required
List six important items that should be contained in an advertisement to
be placed by the hospital in a newspaper having wide circulation in several
cities in the country.

11.4 CRITICAL SKILLS AND COMPETENCIES

Sound Health Pharmaceuticals Limited (SHPL) is a reputable international
company engaged in the business of manufacture of a wide range of
medicines with facilities located in several countries. SHPLs products have
been developed after long periods of research at considerable costs and are
prescribed by medical consultants for patients suffering from life-threatening
diseases. As Director of Human Resources, you have to recruit Director Public
Relations and Media Affairs to replace the incumbent official who is expected to
retire shortly.
Required
Identify and explain briefly eight critical skills and competencies you would seek
in the prospective candidates for this high-profile position in SHPLs senior
management hierarchy.
11.5 RECRUITMENT AND SELECTION PROCESS

List and describe briefly the stages in the recruitment and selection process, after
a job vacancy has been identified.
11.6 APPLICATION FORMS

Explain briefly how application forms are used in the recruitment and selection
process.
11.7 INEFFECTIVE INTERVIEWS

What are the potential consequences of ineffective interviews?
11.8 HUMAN RESOURCES PLAN

You have been asked to prepare a human resources plan for your company as
part of a strategic review. The company currently employs 2,000 people. In five
years, it is estimated that the workforce will be 2,500, with more qualified
engineers and accountants, and fewer IT specialists.
Required
Explain how you would prepare the HR plan for the next five years.
11.9 EMPLOYEE TURNOVER

Accurate Engineering Limited (AEL) is engaged in the business of
manufacturing precision earth drilling tools used by the oil exploration industry.
The Company employs a high proportion of skilled and experienced workers for
the smooth and efficient manufacture of its quality-sensitive high-value products.
Recently, the company has been facing an unusually high rate of employee
turnover which is a matter of serious concern for the management.
Required
Identify five disadvantages which AEL would experience due to the unusually
high rate of employee turnover.

Questions
CHAPTER 12 TRAINING AND DEVELOPMENT
12.1 PERSONAL DEVELOPMENT PLAN

Shakeel Ahmed, a competent and hard-working young officer, is at the initial
stage of his professional career in a leading insurance company. He has an
ambitious goal to reach senior management position within a period of seven
years. He intends to plan his career path well in advance and pursue a Personal
Development Plan (PDP) with a high degree of zeal and commitment.
Required
(a) What do you understand by Personal Development Plan?
(b) What are the principal advantages of adopting and pursuing a well-
formulated Personal Development Plan?
12.2 SERVICE-ORIENTED SUCCESS

One common factor which distinguishes well-managed and highly profitable
service-oriented companies from their competitors is the competence and
commitment of their human resources. The top companies assign very high
priority towards the training and development of their staff and genuinely
consider their human resources as their key strategic assets. In these
companies, training and up-gradation of the quality of human resources, at all
levels, is a continuous endeavour with active involvement of the senior
management.
Required
Explain what competitive advantages these service-oriented companies expect
to derive by committing resources towards training and development of a
competent and committed workforce.
12.3 APOLLO ENGINEERING

(a) Employee Training is an important function of Human Resource Department
of Apollo Engineering Limited, a company which considers workers skills at
the factory floor level to be critical for achieving the overall strategic
objectives. The HR Department classifies the factory employees in 3
categories as follows:
(i) Competent to perform in the present position.
(ii) More than competent to perform in the present position.
(iii) Not yet competent to perform in the present position.*
*Note: These employees are not incompetent
Required
Briefly discuss the Training Needs of employees in each of the above
categories and explain how they would help Apollo Engineering Limited to
improve motivation amongst the employees at all levels.
(b) Appropriate Employee Compensation and Reward Packages are central to
a healthy and enduring relationship between the employer and the
employees. These Compensation and Reward Packages comprise of
salaries and fringe benefits, pleasant working environment, career growth
opportunities, challenging work, self-respect and sense of achievement,
etc.

Required
What principal objectives should an employer seek to achieve through a
well-formulated Employee Compensation and Reward system for a service-
oriented company operating in a competitive business environment?
12.4 TRAINING AND DEVELOPMENT

Explain briefly the difference between training and development.
12.5 ANALYSIS AND REDESIGN

(a) Briefly define:
job enrichment
job enlargement
job rotation.
(b) Which of these might be an objective of a job analysis and job redesign
exercise?

Questions
CHAPTER 13 APPRAISALS AND WORKING ENVIRONMENT
13.1 HEALTH AND SAFETY

(a) The governments generally promulgate comprehensive laws for health,
safety and security of the workers. State five objectives which are
expected to be achieved through these laws.
(b) Safety Engineers are convinced that industrial accidents are attributable to
inadequate Human, Environmental and Mechanical/Technical security
factors. How can responsible management effectively reduce the risks of
accidents in each of these categories?
13.2 LABOUR WELFARE POLICIES

Orient Cement Limited (OCL) aspires to be included in the category of a select
group of progressive companies in the country and is considering a proposal for
introducing significant changes in its labour welfare policies which would offer
tangible benefits to the workers. This would include construction of a housing
colony, provision of medical benefits, subsidised canteen facilities, besides
payment of partial fees for dependent children of the employees.
Required
In your opinion what important benefits would accrue to OCL by introducing
welfareoriented labour policies?
13.3 APOLLO MINING

Apollo Mining Company Limited owns and operates integrated facilities of
mining of coal and iron ore along with power generation and distribution
facilities. Although these facilities have been developed at a substantial
investment cost, the management has been indifferent to the conditions of its
workforce of 1500 employees. A major accident in the coal mines, which
occurred recently, resulting in the death of 120 workers, has triggered wide-
spread resentment and agitation among the workers due to the poor safety
conditions and they have demanded strict compliance with the Mine Safety
Rules and Regulations. Due to the aggressive attitude of the striking workers
and to safeguard its assets, the Company has deployed private armed guards at
a considerable cost. After 28 days of complete closure of all mining and other
business activities due to stand-off and strikes, the management and the
Workers Union have agreed to enter into negotiations through a process of
collective bargaining.
Required
(a) State four factors which, in your opinion, are responsible for the indifferent
attitude of the management of Apollo Mining Company Limited towards its
workers.
(b) Briefly describe five different measures that the management should take
to satisfy the demands of the workers and help to achieve a conducive
working environment.

13.4 HUMAN RESOURCE MANAGEMENT I

(a) Rapidly changing economic, technology and social environment along with
the pressures to produce more value-added products and services at lower
costs compel organizations to adopt measures to utilise their resources in
the most efficient manner. Although Human Resources are not reflected as
assets in the Financial Statements, they play a critical role in the
achievement of the Companys business strategies.
Required
Explain how sound Human Resource Management and Planning policies
can play an important role to enable a Company to successfully achieve its
business objectives.
(b) Although managers at various levels are frequently involved in the
Performance Appraisal of their subordinates, there are certain weaknesses
in this process. Knowledgeable Human Resource Managers are aware of
these weaknesses and take measures to minimise their adverse impact.
Required
In your opinion what kind of limitations should be kept in perspective by
Human Resource Manger while reviewing Performance Appraisal Reports?
13.5 HUMAN RESOURCE MANAGEMENT II

(a) Identify the important functions which have to be performed by the Human
Resources Department of a commercial bank which has a strength of
17,500 employees deployed in a network of 800 branches located
throughout the country. The commercial bank is a well-reputed organization
known for its fair business policies, progressive outlook and concern for
development of a competent and well-motivated cadre of employees.
(b) Research Studies by Human Resource experts have shown that successful
organizations create internal work environments in which the employees
are able to operate at their optimal levels of productivity.
What are the important Human Resource Management practices which, in
your opinion, contribute towards workforce optimization in a manufacturing
plant with several integrated workshops and departments?
13.6 STRESS
It is observed that work-related stress often pose a heavy burden in
organizations and is manifested by frequent absenteeism, late-coming, accidents
and decline in the ability of employees to perform in an efficient manner. In these
situations, Employee Counselling can help to create a secure and an enabling
environment for mitigating the adverse effects of stress on employees and
enabling them to perform at peak levels of efficiency.
Required
Identify the scope of Employee Counselling and explain briefly how such
counselling sessions can help employees to reduce work stress.

Questions
13.7 EMPLOYEE COMPENSATION

Capital Bank Limited is a leading financial institution and is well-known for its
strength in rendering highly efficient professional services to its customers and
keeping ahead of the competitors. The Bank follows a policy of recruiting staff
at the entry level after careful evaluation of the qualifications of the candidates,
their potential for advancement, professional aptitude and career objectives. The
staff is groomed and entrusted with increasing responsibilities after careful
career-path planning for each employee. The Bank operates in a highly
competitive environment where the skills, knowledge and commitment of its
human resources are of critical importance for the success of its business. The
competitors are always on the lookout to identify professional staff and hire them
at more attractive compensation packages.
Required:
(a) What do you understand by the term Employee Compensation Package?
(b) List and explain the essential steps involved in the formulation and
implementation of a well-conceived Employee Compensation Strategy
which the Bank should incorporate in developing its overall HR strategy.

List eight Health and Safety hazards which are often faced by workers in a
typical manufacturing environment.
13.9 SENIOR HRM

(a) The role of Human Resource Managers in companies which have a very
large workforce has assumed increasing importance and they are now
more closely involved and proactive in the Formulation and Implementation
of Strategies at the corporate level.
State the areas of specific responsibilities which fall in the domain of a
Senior Human Resource Manager involved in the Formulation and
Implementation of overall Corporate Strategy of an integrated textile mill
having over 15,000 employees in various cadres.
(b) What is meant by a Strategic Business Unit (SBU)?
13.10 TEEPEE LTD

Teepee Ltd is a small but successful company which specialises in selling car
and home insurance to individuals. All sales are made over the telephone, and
there are no personal callers to the company's offices. The company employs 25
staff, 22 in the telephone sales department and the remaining 3 running all the
accounts and administration functions. As a consequence of its recent success in
the market, Teepee Ltd is planning to expand its operations.
The company has been evaluating its cost structure and has discovered that the
cost of providing office space for each worker is Rs.35,000 per annum. New
workers would require office space with a cost per worker of Rs.40,000 per
annum. This amounts to a significant cost in the company's operating budget.
The Accountant has calculated that 90% of office costs can be avoided if the
telephone sales staff worked from their homes. This idea has, so far, been
discussed only at board level.

At present, employees appear to enjoy working in the office, where they spend
most of their time using the telephone and computer system to sell insurance.
Coffee and lunch breaks are normally spent in the rest area where staff also
compare some notes and queries concerning their jobs. All the data that they
need to perform their job is otherwise available on the computer system. This
data includes:
records on each customer
access to a value added network (VAN) providing costs of insurance from
other companies which sell insurance
Word-processing and other systems for producing letters and insurance
quotes to customers.
The proposal to work from home was put to staff last week and this has met with
some initial resistance although the Accountant stressed that this proposal was
only a possibility.
Required
Write a report to the Managing Director explaining:
(a) From the viewpoint of the staff, the potential benefits that will be gained by
home working. Explain the concerns that staff may have over home
working and whether the IT infrastructure can help alleviate these concerns
(b) What can be done to encourage staff to accept the proposed change
13.11 EVALUATION
Describe the three main elements of staff appraisal.
13.12 ABILITIES
Suggest how the competence of an employee might be assessed.

Questions
CHAPTER 14 STRATEGIC PERFORMANCE MEASUREMENT
14.1 PERFORMANCE INDICATORS

Euro Motors Limited is engaged in the business of manufacturing and
marketing of an extended line of motor cars catering to the varied needs of a
wide segment of the automobile market. The Company operates in a dynamic
market environment dominated by four well-entrenched and strong companies
competing aggressively to achieve leadership status and expand their respective
share of the market.
Required
List six performance indicators, which in your opinion, would help to measure the
success of marketing strategy of Euro Motors Limited.
14.2 CRITICAL SUCCESS FACTORS

Fintex Company Limited (FCL) is in the advanced stage of implementing facilities
for manufacture of home textile products such as curtain draperies, sofa cloth,
bed linen, towels, table covers, etc.
FCL intends to market its products to customers through 20 company-owned
retail outlets to be established in the major cities. FCLs Institutional Marketing
Division (IMD) would sell the companys products, as well as workers uniforms to
be procured from external vendors, to institutional customers such as hotels,
hospitals, industrial companies and government organisations.
FCLs principal corporate objectives are to create a sustainable competitive
advantage and obtain a firm foothold in the substantial and fast growing target
market of middle class customers. These customers are keen shoppers who
want quality products at affordable prices. FCLs IMD also wants to aggressively
pursue marketing strategies to cater to the requirements of the institutional
customers who are a source of repeat business.
Required
Identify and explain briefly four Critical Success Factors which in your opinion
would create sustainable long-term competitive advantage for FCL.
14.3 OBJECTIVE EVALUATION

A well-established and successful Chinese company engaged in the business of
manufacturing of a wide range of home appliances such as refrigerators,
washing machines, microwave ovens and assorted juicers and blenders
intends to launch its products in Pakistan. The Companys management is of
the opinion that its products have significant cost and quality advantages and
can capture 4-5 percent share of Pakistans market in 5 years.
Required
Identify and list at least twelve key parameters which should be considered by
the company for an objective evaluation of the Export Market Potential.
Note: Only list the key parameters explanations are not required.

14.4 NON-FINANCIAL PERFORMANCE INDICATORS

Suggest three non-financial measures of performance that might be helpful to
management in assessing the following aspects of operations in a commercial
bank:
(1) service quality
(2) marketing effectiveness
(3) personnel
14.5 BALANCED SCORECARD

A balanced scorecard approach may be used to set performance targets and
monitor performance.
Required
(a) List the four aspects of performance in a balanced scorecard approach.
(b) Suggest how a professional football club might use a balanced scorecard
approach. Indicate what key aspects of performance might be identified
and suggest performance targets that a football club might use in a
balanced scorecard approach.
14.6 KEY SUCCESS FACTORS

In recent years, some low-cost airline companies have achieved commercial
success and have developed a large network of passenger air routes. One such
airline uses a balanced scorecard approach to setting strategic performance
objectives.
Required
(a) Describe three factors that might have been key factors contributing to the
success of the airline company.
(b) For each of the four areas of the balanced scorecard, suggest three
performance targets that might be used by the airline company.

Questions
CHAPTER 15 PROJECT MANAGEMENT
15.1 MISCELLANEOUS TERMS

(a) Explain the terms network, critical path and float with respect to project
management.
(b) What are the advantages and limitations of using Gantt charts compared to
network analysis in project management?
15.2 QUALITY, TIME, COST AND THE ACCOUNTANT

(a) Explain how the project manager can monitor the quality, time and cost of a
project.
(b) Briefly explain the role that an accountant plays in project management.
15.3 PROJECT PLANNING

Required
Describe the activities encompassed within project planning for systems
implementation.
15.4 PROJECT MONITORING AND REVIEW

Toner Limited is a printing company that has recently begun implementing a new
computerised job costing system. The project manager who had started the
project is now no longer with the company. You have been asked to step into the
role of the project manager and complete the task of implementing the new
system.
Required
(a) You decide that the first thing to do is to review the current status of the
project. Describe the key factors you will be considering in your review.
(b) Your initial investigations reveal that slippage has occurred and it is likely
that the project deadline may not be met. Identify the possible threats to the
success of a project and give a brief suggestion as to how the effect of
each of these may be minimised.

CHAPTER 16 IDENTIFYING AND ASSESSING RISK
16.1 REPUTATION RISK

(a) Explain the meaning of reputation risk for a company, and the sources of
this risk.
(b) Suggest what effect reputation risk might have on a large global company.
16.2 TECHNOLOGY RISK

Explain the nature of technology risk (or technological risk) for companies.
16.3 LIQUIDITY RISK

Explain the nature of liquidity risk and suggest what measures a non-bank
company should take to keep liquidity risks under control.
16.4 MARKET RISK AND DERIVATIVES RISK

Sham Group is a large global group of companies. It has a treasury department
based in the Netherlands. The role of the treasury department is to manage
funding for all the companies in the group and to manage its cash. A part of its
operations involves investing surplus funds in market instruments.
The department is a profit centre, and it is permitted to take speculative positions
in financial and commodity markets, in order to make profits.
The newly-appointed head of the treasury department recognises the need for all
treasury staff to be aware of the risks they face in their work, and to understand
the need to monitor and control risks. He has called a meeting to speak to the
staff about market risk and derivatives risk.
Required
Explain the nature of market risk and derivatives risk, and how these are relevant
to the work of the treasury department.
16.5 RISK MANAGEMENT

Labcoats is a charity that raises funds for investment in research into a major
disease. There are four charities in the country that raise funds for similar causes.
Labcoats is the second largest, but it is much smaller than the largest charity,
Medhelp.
Medical research into the major disease has made substantial progress in recent
years, but the cost of investing in a new research projects is now much higher
than it was ten years ago. One new three-year project could require funding
equal to about 75% of the annual revenue collected by Labcoats.
Labcoats has been in existence for about 25 years. A new managing director has
been appointed, who wants to introduce risk management systems. He believes
that the risks facing the charity are not sufficiently recognised, and systems
should be in place for identifying and assessing risks and devising policies and
procedures for dealing with those risks.
Required
Suggest what might be the main risks facing Labcoats, and the nature of risk
management measures that might be taken to deal with them.

Questions
16.6 MANAGING CREDIT RISK

The finance director of Basket Company is preparing a proposal to put to the
board of directors. He believes that the company is much too cautious in its
policy of giving credit to customers. At the moment all customers are given 30
days credit.
He believes that by increasing its exposure to credit risk, and increasing credit
terms to 60 days, the company will achieve an increase in annual sales of up to
20%. He also thinks that some improvements in debt collection procedures will
reduce the level of bad debts, although some bad debts cannot be avoided. He
thinks that the value of sales where there is a default will fall each year from 2%
of sales to 1.8% of sales.
He believes that in order to increase annual sales and profits, the company
should be willing to increase its risk appetite, and accept the risk of higher bad
debts.
Required
Using this example of managing credit risk, explain and illustrate the meaning of:
exposure to risk
risk of losses
residual risk
risk appetite.
16.7 RISK MAP AND RISK DASHBOARD

Explain briefly the nature and purpose of:
(a) a risk map, and
(b) a risk dashboard.
16.8 CRANAGE COMPANY

Colin Rowe, a professionally-qualified accountant with many years of experience
in industry and commerce, is the newly-appointed independent chairman of
Cranage Company, a quoted company that specialises in construction contracts.
He arranges to meet Willie Tell, the companys Chief Executive Officer (CEO).
The main purpose of the meeting is to discuss a major contract for the provision
and maintenance of a new street lighting system in a major city. Under the
proposed scheme, the company that wins the contract will be required to provide
the capital to finance the new street lighting scheme. The city government
authorities will repay the cost of the capital expenditure gradually, over a period
of fifteen years, within the annual payments to the company for the provision of
maintenance services for the lighting system.
There are only two companies in competition to win the contract and both have
been invited to submit a tender for the contract. One is Cranage Company and
the other is Wenslas Ltd.. This rival company was a large quoted company until
last year, when it was purchased by a private equity firm and converted into a
private company.
Willie Tell believes that Wenslas Ltd. has a big advantage because it is a private
company and, unlike Cranage Company, it is not subject to the requirements of
the countrys code of corporate governance. Although this is a voluntary code,

the stock exchange requires all quoted companies to comply with the provisions
of the code or explain any non-compliance. The main problem, in the view of
Willie Tell, is that the system of corporate governance gives non-executive
directors the responsibility for monitoring executive management and criticising
what they do.
Colin Rowe replies that in his opinion, although a company owned by a private
equity firm is not required to comply with the requirements of the code of
corporate governance, there are some aspects of best practice in the corporate
governance code that are still relevant to a large private company.
Colin Rowe moves him on to a discussion about the bid for the contract to install
and maintain the city street lighting system. They agree that the company will
need to raise the finance for the work by borrowing in the capital markets. If the
company wins the contract, it would have to ensure that the contract work is
completed on time and to budget in order to start earning revenue from the
maintenance contract as quickly as possible.
Willie Tell explains how his project team have tried to keep planned costs to a
minimum, but the price the company intends to quote is not much higher than the
planned costs of the contract. This is because Willie believes that in contracts
with local government authorities it is usually fairly easy to negotiate price
increases because of weak internal controls and cost monitoring systems in the
local authoritys accounts department. The companys bid for the contract has
also ignored new environmental and safety regulations about street lights. He
expects to persuade the customer to pay for the extra costs of these items after
the company has won the contract. Lets worry about winning the contract first,
he tells Colin Rowe, Then we can worry about getting as much money from the
customer as possible.
Colin Rowe tells Willie he is worried about several comments that he has made.
He can see a number of risks in the contract: market, liquidity, legal,
environmental, reputation, health and safety and business probity risks.
At the end of the meeting, Colin Rowe raises the subject of the external auditors.
At the next board meeting the audit committee will probably recommend that the
auditors should be re-appointed for the next year, but with a larger budget for a
more extensive annual audit. Willie Tell expresses the view that his preference
would be to cut the audit fees and have a smaller audit, since he saw no real
value in what the auditors did. Colin Rowe replies that in his view that within a
system of internal control external audit reports are one of the most
indispensable elements of good corporate governance.
After the meeting, Colin Rowe thinks about the attitudes of Willie Tell. In Colins
view, Willie does not believe in transparency and is a clear example of the
agency problem in corporate governance. He starts to plan how he should handle
the forthcoming board meeting.
Required
(a) Suggest the reasons why Colin Rowe can see market, liquidity, legal,
environmental, reputation, health and safety and business probity risks in
the proposed contract, if Cranage Company were to win it. Recommend
how the company should evaluate and monitor these risks.
(b) Explain the nature of transparency and information asymmetry, and why
these are important issues for good corporate governance
(c) Explain the importance of the external audit as an indispensable element of
good corporate governance.

Questions
16.9 JPX
Chemco is a well-established listed African chemical company involved in
research into, and the production of, a range of chemicals used in industries such
as agrochemicals, oil and gas, paint, plastics and building materials. A strategic
priority recognised by the Chemco board some time ago was to increase its
international presence as a means of gaining international market share and
servicing its increasingly geographically dispersed customer base. The Chemco
board, which operated as a unitary structure, identified JPX as a possible
acquisition target because of its good product fit with Chemco and the fact that
its geographical coverage would significantly strengthen Chemcos
internationalisation strategy. Based outside Africa in a region of growth in the
chemical industry, JPX was seen by analysts as a good opportunity for Chemco,
especially as JPXs recent flotation had provided potential access to a controlling
shareholding through the regional stock market where JPX operated.
When the board of Chemco met to discuss the proposed acquisition of JPX, a
number of issues were tabled for discussion. Bill White, Chemcos chief
executive, had overseen the research process that had identified JPX as a
potential acquisition target. He was driving the process and wanted the Chemco
board of directors to approve the next move, which was to begin the valuation
process with a view to making an offer to JPXs shareholders. Bill said that the
strategic benefits of this acquisition were in increasing overseas market share
and gaining economies of scale.
While Chemco was a public company, JPX had been family owned and operated
for most of its thirty-five year history. Seventy-five percent of the share capital
was floated on its own countrys stock exchange two years ago, but Leena Sharif,
Chemcos company secretary suggested that the corporate governance
requirements in JPXs country were not as rigorous as in many parts of the world.
She also suggested that the family business culture was still present in JPX and
pointed out that it operated a two-tier board with members of the family on the
upper tier. At the last annual general meeting, observers noticed that the JPX
board, mainly consisting of family members, had dominated discussions and
had discouraged the expression of views from the companys external
shareholders. JPX had no non-executive directors and none of the board
committee structure that many listed companies like Chemco had in place. Bill
reported that although JPXs department heads were all directors, they were not
invited to attend board meetings when strategy and management monitoring
issues were being discussed. They were, he said, treated more like middle
management by the upper tier of the JPX board and that important views may not
be being heard when devising strategy. Leena suggested that these features
made the JPX boards upper tier less externally accountable and less likely to
take advice when making decisions. She said that board accountability was
fundamental to public trust and that JPXs board might do well to recognise this,
especially if the acquisition were to go ahead.
Chemcos finance director, Susan Brown advised caution over the whole
acquisition proposal. She saw the proposal as being very risky. In addition to the
uncertainties over exposure to foreign markets, she believed that Chemco would
also have difficulties with integrating JPX into the Chemco culture and structure.
While Chemco was fully compliant with corporate governance best practice, the
country in which JPX was based had few corporate governance requirements.
Manprit Randhawa, Chemcos operations director, asked Bill if he knew anything
about JPXs risk exposure. Manprit suggested that the acquisition of JPX might
expose Chemco to a number of risks that could not only affect the success of the
proposed acquisition but also, potentially, Chemco itself. Bill replied that he would

look at the risks in more detail if the Chemco board agreed to take the proposal
forward to its next stage.
Finance director Susan Brown, had obtained the most recent annual report for
JPX and highlighted what she considered to be an interesting, but unexplained,
comment about negative local environmental impact in its accounts. She asked
chief executive Bill White if he could find out what the comment meant and
whether JPX had any plans to make provision for any environmental impact. Bill
White was able to report, based on his previous dealings with JPX, that it did not
produce any voluntary environmental reporting. The Chemco board broadly
supported the idea of environmental reporting although company secretary
Leena Sharif recently told Bill White that she was unaware of the meaning of the
terms environmental footprint and environmental reporting and so couldnt say
whether she was supportive or not. It was agreed, however, that relevant
information on JPXs environmental performance and risk would be necessary if
the acquisition went ahead.
Required
(a) Manprit suggested that the acquisition of JPX might expose Chemco to a
number of risks. Illustrating from the case as required, identify the risks that
Chemco might incur in acquiring JPX and explain how risk can be
assessed.
(b) Write a memo to Leena Sharif defining environmental footprint and briefly
explaining the importance of environmental reporting for JPX.
16.10 PINGO PLC

The Board of Pingo plc are considering the implementation of three new
computer systems.
Salary system
This will replace the existing three salaries systems with one global system. The
change has been prompted partly by the lack of available record space within the
existing systems, and partly by new legislation making parts of the old systems
legally incorrect. The new system will be purchased "off-the-shelf" from a
specialist supplier of payroll systems and will be implemented at the end of the
fiscal year.
Inventory records
Inventory records are currently maintained using third party software. The system
has been in the organisation for a number of years and uses DOS as the main
operating system. Although the functionality of this package is adequate for
existing requirements, the software will not be compatible with the new Windows
interface being introduced next year.
The development and implementation of the system must be completed within 24
weeks, as the old operating system will be discontinued at this date, detailed
GANTT and network charts indicate that this is an achievable target. New on-line
stock control equipment will be integrated into the overall operating system.
Extranet links
The directors have recognised the need to provide some form of on-line access
to the company database, partly because of falling orders in established trading
systems, and partly due to competitors providing similar systems. A recent survey
of customers indicated that additional on-line support to help repair and maintain
Pingo's products would be useful.

Questions
A project manager has been appointed to investigate this requirement, with the
brief to start a systems analysis and prepare detailed plans. An initial budget has
been allocated to the project, although there are no deadlines for a feasibility
report or appropriate budget monitoring systems in place.
Required
(a) Explain the main factors that affect the overall risk of failure of IT projects
within organisations.
(b) Evaluate, stating your reasons, the degree of risk of failure of each of these
system projects.

CHAPTER 17 CONTROLLING RISK
17.1 RISK MANAGEMENT APPROACH

Explain, with an example for each, the following approaches to risk management:
(a) risk reduction
(b) risk transfer
(c) risk avoidance
(d) risk sharing.
17.2 RISK MANAGEMENT REVIEW

Bobby Smythe has just been elected to the board of directors of Trans Gadgets,
a large manufacturing company, as an independent non-executive director. It is
his first appointment as a non-executive director, and he is not yet familiar with
his role and responsibilities.
At the next board meeting, an item on the agenda is a review of risk management
within the company. The board are required by the countrys code of corporate
governance to review each year the adequacy of the system of risk management.
Bobby Smythe is preparing a list of questions to ask at the board meeting on this
topic. He wants to obtain satisfactory answers to his questions before he will be
prepared to agree that the risk management system is adequate.
Required
Prepare a list of at least six questions that Bobby Smythe should ask, to help him
assess the adequacy of the companys risk management system.
17.3 RISK MODEL

Describe the features of a risk model and explain the purposes of using a risk
model in business.
17.4 RISK CULTURE

Explain the meaning of embedding risk in a companys culture, values and
procedures. Describe how this can be achieved.
17.5 RISK MANAGEMENT AND AUDIT

(a) Explain the responsibilities of a risk manager.
(b) Briefly describe the four stages in a risk audit and summarise the
advantage of using internal auditors to perform risk audits.

Questions
CHAPTER 18 BUSINESS AND PROFESSIONAL ETHICS
18.1 CODE OF ETHICS

What do you understand by Code of Ethics in the context of a business
organization?
State four advantages which in your opinion are important for adopting a
Code of Ethics?
18.2 DENTAL EQUIPMENTS LTD

(a) Dental Equipments Limited (DEL) is engaged in the business of
manufacture of a wide range of equipment used by private dentists as well
as leading hospitals. The Company strives hard to achieve sustainable
growth and meet the requirements of highly demanding dentists who want
the very best and the latest equipment to serve their patients.
DEL has recently observed a trend of unethical practices followed by its
sales representatives. The sales representatives who are not able to meet
their targets, book fictitious sales at year ends and later record them as
sales returns. They also share a portion of their commissions with the
purchase representatives of the major hospitals.
Required
State what policy measures DEL should adopt to eliminate the unethical
practices of the sales representatives.
(b) State the situations in which an MNC would prefer to operate in a foreign
country as a branch instead of establishing a subsidiary company.
18.3 FUNDAMENTAL PRINCIPLE

Explain what is meant by integrity and why integrity is a fundamental ethical
principle, both in corporate governance and for a professional accountant.
18.4 PUBLIC INTEREST

Explain what is meant by the public interest and indicate ways in which
professional accountants are expected to show a concern for the public interest.
18.5 BUSINESS AND PROFESSIONAL ETHICS

(a) Describe the main differences between a business code of ethics and a
professional code of ethics for accountants.
(b) Explain four situations in which an accountant might face a moral or ethical
dilemma.
18.6 SIGNIFICANCE OF BUSINESS ETHICS

Explain the term Business Ethics and discuss its increasing significance in the
present business environment.

CHAPTER 19 CONFLICTS OF INTEREST AND ETHICAL CONFLICT

RESOLUTION
19.1 WORKSHOP
You are a sole practitioner in public practice and you have taken on three new
appointments. One is to prepare the annual accounts of a small business
partnership with two partners, and the other two are to assist with the tax affairs
of the two individual partners.
After taking on the appointments, you are told that the partners have now agreed
to dissolve the partnership. One partner plans to retire and the other will take
over the entire business and run it as a sole trader business. The partners have
discussed how the assets of the business should be transferred to the partner
who will remain as the owner.
You are informed that the partners have privately agreed an amount for the value
of the goodwill of the business, and the retiring partner will receive 50% of this
agreed goodwill value plus the return of his balance sheet capital.
You are aware that in the balance sheet, the main asset is a workshop, which is
valued at cost, at Rs.12m. You do not have a current valuation, but you estimate
that this workshop could have a current market value in excess of Rs.25m. You
do not know whether the retiring partner is aware of this, and you are concerned
that the agreed value for business goodwill might therefore be too low. It has also
not escaped your notice that the book-keeper for the partnership business is the
husband of the partner who is acquiring the entire business.
Required
Consider whether there is an ethical issue in this situation, and whether you have
a duty to bring the value of the workshop to the attention of the retiring partner.
Suggest what you should do, if anything.
19.2 MARTHA
The board of a company was about to make a decision about whether to make a
very large investment to produce and market a new range of products. Jerry, the
senior management accountant, prepared figures for a board paper that analysed
the financial implications of the investment. He used a spreadsheet model to
prepare the figures, but did not ask anyone to check his figures. Martha, one of
the team working for Jerry, subsequently found some errors in the figures that
Jerry had prepared, which were caused by a small error in the spreadsheet
model. Although the error in the model was small, it had a big effect on the
figures. The original figures indicated that the new investment should be
undertaken. The amended figures raised doubts about whether the investment
would be financially viable.
Martha told Jerry about the errors in the figures, but Jerry decided not to inform
the board. At the next board meeting, the directors decided that the investment
was too risky, and decided not to proceed with it. Martha was relieved, but felt
that she could not ignore the problem of the errors in the figures. She had a
meeting with Jerry, and Jerry agreed that in future he would involve his team
more closely in preparing and checking figures that were produced as
management information.

Questions
Two months later Jerrys boss, Bill, spotted some errors in another set of figures
that Jerry had produced and he asked Martha to correct them. In making the
corrections, Martha found even more errors that Bill had not seen, and she
brought the matter to the attention of Jerry. Jerry told her to correct the errors that
Bill had seen, but not the others. He didnt want to lose face with his boss, and
he didnt think that the errors mattered too much.
Required
(a) Suggest, with reasons, whether Martha took appropriate action in relation
to the incorrect figures produced by Jerry for the board paper.
(b) Suggest with reasons the action, if any, that Martha should take in the
current problem about providing the corrected information for Bill.
19.3 OBJECTIVITY
Richard is working on the audit of a company that operates a chain of jewellery
shops. You mention to the finance director that you are looking for a special
birthday for your mother and you are thinking of buying her a necklace.
Two days later, the finance director comes into the office where you are working
and shows you a tray full of necklaces. He tells you that he is able to offer you
any of the necklaces for a good discounted price.
Required
Explain the ethical issues involved in this situation, and recommend the action
that Richard should take.
19.4 CODE OF PROFESSIONAL ETHICS

What is the main difference between a rules-based and a principles-based code
of professional ethics for accountants?
19.5 VENAL FOODS

Ben Meakin is a senior accountant with Venal Foods, a company that imports
and sells a range of meat products. A large quantity of meat was delivered from a
supplier in Eastern Europe. This was checked by the companys hygiene and
safety inspectors, who reported that some of the meat was contaminated with a
virus that could be very harmful to anyone eating it.
Ben was at a meeting where the senior management decided that the risk to
human health was probably low, and that the company should sell the meat to its
customers in the normal way. However, Ben did not hear any convincing
explanation about why the risk was low.
When Ben mentioned the hazards to public health, he was told that as an
accountant he did not properly appreciate the risks and that he should leave the
decisions to operational management. He should ignore the problem, as this was
his duty as an employee of the company.
Required
(a) Explain the ethical responsibilities of a professional accountant to his
employer.
(b) Explain the ethical responsibilities of a professional accountant as a
professional.
(c) Advise Ben Meakin what action he should take in this situation, giving
reasons for your advice.

CHAPTER 20 CORPORATE SOCIAL RESPONSIBILITY AND

SUSTAINABILITY
20.1 PROGRESSIVE CORPORATE SOCIAL RESPONSIBILITY

(a) Currently, a large number of progressive companies are in the various
stages of adopting policies of Corporate Social Responsibility. Explain what
you understand by the term Corporate Social Responsibility.
(b) In your opinion what are the major concerns which prevent organizations
from adopting and implementing comprehensive policies of Corporate
Social Responsibility?
20.2 EXCEL CHEMICALS

Excel Chemicals Limited (ECL) owns and operates facilities for the manufacture
of industrial chemicals, including various types of highly corrosive acids. The
Companys operations involve processes of procurement, production, packaging,
storage and transportation of chemicals which can result in serious fire, physical
injuries and other environmental and health hazards in the event of any lapses in
the safety procedures.
Required
Identify and explain briefly six safety steps which should be adopted and
implemented by the management of ECL as a responsible employer.
20.3 AUSTERITY AND CSR

(a) Business firms, at times, place excessive emphasis on Cost Reduction
and Austerity policies to achieve their profit objectives. These policies may
be in conflict with the interests of customers, employees and the society as
a whole.
Required
Identify any three adverse effects of introduction of stringent Cost
Reduction and Austerity policies on each of the above stakeholders.
(b) What is meant by the term Corporate Social Responsibility?
(c) State five important factors which should be included in developing an
effective Accident Prevention and Reporting System for a company
involved in heavy mechanical and engineering operations.
20.4 ENVIRONMENTAL FOOTPRINT

Explain the meaning of the term environmental footprint and suggest how a
company might provide a report to shareholders and the public in general on its
environmental footprint.
20.5 SUSTAINABILITY REPORTING

(a) Describe the nature and features of a sustainability report.
(b) Explain why sustainability reports should be verified and suggest a way in
which verification can be provided.

Questions
(c) Explain the difference between sustainability reporting and social and
environmental risk reporting.
20.6 SOCIALLY RESPONSIBLE INVESTMENT

A large number of institutional investors pursue policies of Socially Responsible
Investment (SRI) and seek to invest in suitable companies and avoid investing in
others. Hilda Dooner is a fund manager working on behalf of a major pension
fund. She has been asked to attend a conference on corporate governance,
because of its relevance to SRI. She is not sure about the connection between
corporate governance and SRI, although she thinks it may have something to do
with ethical investments.
Required
(a) Explain the nature of Socially Responsible Investment (SRI) by investment
institutions.
(b) Discuss the factors that have resulted in pressure on institutional investors
for more SRI.
(c) Explain the connection between SRI, good corporate governance and the
demand for more disclosures about CSR issues.
20.7 CORPORATE SOCIAL RESPONSIBILITY

Explain the nature of corporate social responsibility (CSR) and list the ways in
which CSR should be demonstrated.
20.8 CSR AND ENVIRONMENTAL STRATEGY

(a) List the main issues commonly associated with corporate social
responsibility (CSR).
(b) What is an environmental strategy?
(c) What might be the benefits to a company of developing and implementing
an environmental strategy?
(d) What environmental standards might a company adopt?
(e) What is the relevance of environmental strategy to risk and corporate
governance?


B
SECTION
Answers
CHAPTER 1 - STRATEGY, STAKEHOLDERS AND MISSION
1.1 MISSION STATEMENT I
Mission Statement
EWCD is committed to the development of human capabilities through the sharing
of knowledge and application through service. It seeks to prepare individuals who
would be exemplary doctors and nurses, through excellence in research and
education, all dedicated to provide meaningful contribution to society in the
treatment of diabetes.
1.2 MISSION STATEMENT II

(a)
Purpose of mission statement In the FastPlane mission statement
To state the purpose of the Providing safe, good value point-to-
entity and the business it is in point services, at attractive prices, for
(and will be in) business and leisure passengers
within Europe.
To express the values and Safe, good value, consistent and
beliefs of the entity, to influence reliable services
the views of key stakeholder
groups inside and outside the
firm
To provide a guide for strategic Develop employees
decisions Establish good relationships with
suppliers
Limit services to Europe
Leisure and business passengers
Safety standards
Reliability standards
Mission statements should be re-visited regularly, to make sure that they
remain relevant. For example, FastPlane would need to reconsider its
mission statement if it were to consider the possibility of providing non-air
transport services, or to open routes outside Europe.

(b) RIBC developed five strategic objectives from its mission statement. You
can check your ideas against them. RIBC strategic objectives are:
(i) To demonstrate the benefits of good cake-making, for the economy,
community and individuals
(ii) To promote and enhance these benefits, in collaboration with industry
and partners.
(iii) To facilitate the delivery of good cake-making raising the average
through professional training and development.
(iv) To provide high-quality support services to its members, clients,
industry associations and the public
(v) To develop its own capabilities to deliver these strategies.
These strategic objectives were then used to formulate strategies to
achieve the objectives.
1.3 DECISION MAKING PROCESS

(a) The following important points should be considered when one is involved
in the decision making process:
(i) have a clear perspective of the goals to be achieved.
(ii) develop the timeframe for reaching the final decision.
(iii) analyse the nature of the problem in sufficient detail according to the
importance of the final outcome of the decision.
(iv) examine the various available options.
(v) weigh the possible consequences of selecting any one or combination
of actions.
(b) Operational Level Decisions
decisions are concerned with day-to-day systems and procedures.
decisions are more structured and are of a routine nature.
outcomes of decisions are immediate and of short term nature.
decisions involve fewer risks.
Tactical Level Decisions
decisions are concerned with short to medium term objectives.
decisions are often related with implementation and success of
strategic decisions.
decisions are concerned with overseeing and handling of budgets,
personnel, schedules and resources.
risks of failure of decisions are moderate.
Strategic Level Decisions
decisions are concerned with long-term goals and future direction of
business.
decisions are more conceptual and have elements of uncertainty.
decisions have far-reaching consequences and are therefore of
considerable importance.
decisions are taken at the highest management and board levels.

Answers
1.4 VISION AND MISSION STATEMENTS

(a) Vision and Mission Statements are manifestations of the unique identities
of an organization. They are enduring statements containing:
business philosophy
unique purpose
goals of business
The above are inter-twined with the competitive advantages which
distinguishes it and sets it apart from others.
(b) The drawbacks of adopting Vision and Mission Statements of more
successful rival companies, with certain changes and modifications, are as
follows:
(i) Vision and Mission Statement of a firm is inextricably inter-linked with
its management philosophy, purpose of business and distinctive
capabilities which cannot be replicated in their entirety by other firms.
(ii) The imitated version of a Vision and Mission Statement cannot be
an enduring or permanent feature and frequent lapses or
deviations in actual performance are bound to create resentment
and suspicion among the internal and external stakeholders.
1.5 SHORT-TERMISM
(a) Mission-oriented business strategists do not view the strategy of short-
termism outlook favourably because it ignores the principle that long-term
economic maximization of wealth and pursuit of objectives on a sustainable
basis cannot be achieved by maximizing economic wealth in each of the
individual short-term periods.
(b) Examples:
A pharmaceutical company may not incur expensive R&D costs and be
satisfied with its existing line of products which are popular. Although this
would result in high profits in the short-term, the long-term performance
would suffer as new and more effective medicines are introduced in the
market by the competitors.
A beverage company may prefer to defer advertising expenditures to
reduce the costs and report high profits. However, in the long-run, the
company may lose the efficacy of its brands and competitive advantage to
other more aggressive competitors.
1.6 FINE SUGAR MILLS

Key stakeholders of FSML and their importance for the sustainable and long-
term profitable operations of the Company are:
(a) Shareholders: The shareholders are the ultimate owners of the Company
and it is important to maximise their wealth through sustained growth in real
earnings and profitable expansion of the business.
(b) Distributors and Customers: The distributors and customers are
important as the Company can operate profitably only if it is able to
build long-term relationship with the distributors and the ultimate
customers by offering quality products and value for money.

(c) Cane Growers: The sugar cane farmers are critical stakeholders as the
Company has to build ongoing relationship with them for supply of good
quality cane according to the pre-determined delivery schedules.
(d) Employees: The employees are important as the staff have to be trained
and motivated to enable the Company to maintain and strengthen its
reputation as a progressive company and be able to continue to operate
as a profitable entity.
(e) Creditors: The creditors, including the banks, are important stakeholders
as substantial amounts of finances are required by FSML for making
payments to the cane growers, financing of stocks of sugar manufactured
during the crushing season, purchase of components, parts and spares,
etc. The creditors are important stakeholders as they have to provide funds
to meet FSMLs requirements.
(f) Government: The government officials at various levels play an effective
role for the smooth operations of FSML for movement of heavy traffic,
maintaining law and order particularly during the crushing season, its role
for fair pricing of sugar and ensuring its availability for the consumers
throughout the country.
(g) Community: The neighbouring community has to accept the Company as
a socially responsible and conscientious corporate citizen mindful of its
obligations to the community and its overall welfare.
1.7 FORMAL BUSINESS STRATEGY

(a) Companies accord importance to the pursuance of a formal Strategic
Planning Process to achieve the following objectives:
(i) A formal Strategic Planning Process helps to identify the opportunities
and risks involved in the companys business. The company can
make well-considered strategies and adopt measures to seize the
opportunities accruing from its internal and external strengths and
also reduce the various business risks.
(ii) A formal Strategic Planning Process enables the companys top
management to be involved in proactive thinking of the business
objectives and taking coordinated actions relating to deployment of
resources to achieve its strategic goals.
(iii) A formal Strategic Planning Process ensures the participation of
management and the staff who are seized with the task of
achievement of the business objectives. The staff at all levels develop
an understanding of the productivity-reward relationship in the
strategic plans which increases their motivation and reduces the
adverse impact of resistance to change.
(iv) A formal Strategic Planning Process is essential to create alignment
of the companys short-term, medium-term and long-term targets for
achievement of the companys objectives.
(v) A formal Strategic Planning Process is essential for optimum
coordination of the corporate, business and functional strategies for
achievement of the Companys objectives.

Answers
(b) In the formulation of a well-considered Business Strategy, the management

conducts an Appraisal of the companys internal and external environment.
For this purpose SWOT Analysis may be carried out in order to find ways
for (a) exploiting the companys strengths to help achieve short-term and
long-term objectives and (b) reviewing the weakness and threats faced by
the company from the following standpoints.
The steps in the implementation of a well-considered Business Strategy
are:
(i) Organizational Structure: Organization Structure is suitably integrated
for achieving harmony among the various departments and functions
and co-ordination at all levels.
(ii) Human Resources: Human resources with necessary skills and
proper motivation are deployed in appropriate positions for effective
implementation of strategy.
(iii) Availability of Financial Resources: Adequate financial resources
should be made available in time for implementation of the strategy.
(iv) Technology: Appropriate technological inputs are made available to
support the performance necessary to achieve the objectives of the
strategic plans.
(v) Decision Process: Sound policies and processes are developed to
ensure that all significant decisions are taken on time and in a
coordinated manner.
(vi) Monitoring and Control Systems: Appropriate systems are
established to ensure that progress is monitored against the
established standards on a continuous basis and deviations if any are
identified for taking timely corrective actions for implementation of the
strategic plans.
1.8 INNOVATIVE STRATEGY

The distinguishing characteristics of organizations which pursue innovative
corporate strategies are:
(a) they compete in the market on the basis of their differentiated superior
products/services as compared to the offerings of other companies;
(b) they are continuously searching for new growth platforms for their business
and are several steps ahead of their competitors;
(c) they are able to anticipate threats from competitors and seek to respond
with new or better products/services to sustain their competitive advantage;
(d) they are always making efforts to develop new and innovative products to
provide greater customer value;
(e) they are forward looking visionaries and are continuously searching for
means to change their
(f) strategic direction;
they value management cohesiveness at all levels and both the strategy
planners and those

1.9 POWER-INTEREST MATRIX

(a) The power/interest matrix can be used by an entity to map:
the relative interest of various stakeholders in the decisions of the
entity, and
the power of each of these stakeholder groups to affect the outcome
of those decisions.
Power is rated on a scale of 0 to 10 (low to high) on one side of the matrix
and interest is also rated on a scale of 0 to 10 (low to high) on the other
side of the matrix.
(b) Sources of the power of individual stakeholders or stakeholder groups
include the following:
Internal stakeholders: sources of External stakeholders: sources

power of power
Position in the management Control over key supplies

hierarchy
Control over strategic resources Involvement in the

implementation of the decision
Relevant knowledge/skills Relevant knowledge/skills
Personal influence
Ability to block a proposal (e.g. When the government is a

shareholders may be able to vote stakeholder: power to regulate
down a management proposal)
(c) The matrix may be used when a change is planned. It can be used to
identify, for each stakeholder or stakeholder group, the strength of their
interest in the change and their power to influence its outcome.
Measures can then be taken to satisfy each stakeholder, and reduce the
risk of their opposition to the planned change. In general terms the matrix
provides the following recommendations:
Power Interest Tactic
Low Low Minimal effort required
Low High Keep these stakeholders informed about plans and

developments
High Low Make sure that these stakeholders are kept

satisfied
High High Key players: these stakeholders must be given the

most attention and consideration.

Answers
CHAPTER 2 ENVIRONMENT ANALYSIS

2.1 FOREIGN D I R E C T INVESTMENTS AND POLITICAL RISK
(a) Political risk is the probability that political decisions or events would
negatively affect the long-term security and profitability of an investment in
a foreign country.
(b) The different types of Political Risks which would adversely affect the
security and long-term profitability of direct foreign investment in a third
world country are:
(i) Domestic Instability Domestic instability relates to the risks of
subversion, revolution, internal conflict and government crisis.
(ii) Foreign Conflict Foreign conflict pertains to the extent of hostility
and disputes that a country has with other country(ies).
(iii) Political Climate Political climate can be affected by radical shifts
in government policies and can be influenced by the number of
political parties, their level of maturity, political and economic agenda
and approaches towards free or restrictive foreign investment
policies.
(iv) Economic Culture Economic culture refers to the risks of
significant shifts in policies concerning government involvement and
control of economic activities as well as financial markets, including
currency fluctuations, inflation, repatriation of capital and dividends,
regulation of prices of essential inputs and development and
maintenance of infrastructure.
(v) Level of Corruption Level of corruption refers to the degree to
which the various institutions, including the government, are
perceived to be untrustworthy, open to bribes and involved in various
types of fraudulent and unethical practices.
2.2 POLITICAL RISK

a) The different types of Political Risks which should be evaluated by Accurate
Engineering Limited are:
(i) The assets may be nationalised or expropriated by the government of
the host country.
(ii) The Asian country may impose stringent exchange control restrictions
which would make it difficult to repatriate the profits and investments.
(iii) The country may face domestic instability such as revolution, social
and political unrest and terrorist activities which would be detrimental
to the interests of Accurate Engineering Limited.
(iv) The country may be involved in conflict, disputes and war with other
countries which would cause disruptions in business.
(v) Deterioration of relationships between the investor country and the
country in which the investment is proposed would pose difficulties in
the business operations of Accurate Engineering Limited.
(vi) Frequent changes in the government with far reaching shifts in its
policies.
(vii) Risk of sovereign default by the host country.
(viii) Maintenance of the tolerance standards, relaxation in any way could
impact the demand.

2.3 JAPANESE EXPORTS

(a) The leading Japanese companies have established automobile assembling
or manufacturing plants in selected developing countries due to the
following reasons:
(i) The developing countries are witnessing significant economic growth
and increase in population which have created very large markets for
various types of vehicles. Establishment of automobile
assembly/manufacturing plants locally would fulfil the demand/supply
gaps in these countries.
(ii) Labour and other manufacturing costs are on the high side in Japan
and the high prices of imported vehicles from Japan would be beyond
the reach of a large segment of the market.
(iii) The strong Japanese Yen makes the price of imported vehicles very
expensive in the developing countries and would restrict the size of
the market
(iv) Transfer of technology and creation of job opportunities are viewed
favourably by the governments in the developing countries and they
offer liberal tax concessions to the Japanese companies to establish
assembling/manufacturing facilities in their countries
(v) The domestically assembled/manufactured vehicles of various types
and models are adapted to meet the local requirements in terms of
prices and their suitability for the particular developing countries.
(b) The following Political Factors should be taken into consideration by a
multinational company while evaluating a decision to make substantial
direct investment in a foreign country:
(i) Form of the Government and its Stability - a government having the
support of its citizens and enjoying political stability would provide
continuity to its economic and financial policies which would be
beneficial for MNC.
(ii) Attitude towards Private and Foreign investment - a government
which pursues policies of encouragement towards private investment,
including foreign investment, would be considered favourably as
against policies which pursue government ownership of business
enterprises.
(iii) Relations with other countries - a country which has good relations
with other countries would be considered favourably as it would
provide stability and sustained long-term operations for MNCs
business.
2.4 PESTEL MODEL

(a) Porters 5-force model.
(b) (i) Political environment
(ii) Economic environment
(iii) Social and cultural environment
(iv) Technological environment
(v) Environmental/sociological influences
(vi) Legal environment

Answers
(c) (i) Political environment. Oil companies are affected by the politics of
many of the oil-producing nations, and the use of oil supply and oil
prices by the governments of some of these countries to exert
pressure in world politics. There are also political disputes about the
ownership by nations of rights to drill offshore in some parts of the
world.
(ii) Economic environment. Oil companies, like all other commercial
economies, are affected by the current and expected state of the
world economy and national economies. However, the importance of
oil is such that the decisions and activities of oil companies can have
a significant effect on the world economy.
(iii) Social and cultural environment. Oil companies need to consider
the attitudes of societies towards the consumption of oil. The green
movement is strong in some countries, and there is an increasing
willingness among people to consider using alternative (non-oil)
sources of energy.
(iv) Technological environment. Oil companies are affected by
developments in technology, particularly developments in the
technology for using alternative energy sources, and R&D into more
fuel-efficient technology that uses oil.
(v) Environmental/sociological influences. Oil is at the centre of
concerns about greenhouse gases. Oil companies are also affected
by concerns for the protection of the environment and the ecology (for
example, concerns about pollution from oil spillages). There are also
concerns about how long supplies of oil will last.
(vi) Legal environment. Oil companies will be affected by continuing
legislation to protect the environment and to punish companies found
guilty of environmental pollution.
2.5 AVIATION AND PESTEL ANALYSIS
General environmental Pollution and global warming will inevitably

issues (ecological issues) affect airlines, through cultural, economic,
legal and/or technological change.
Social and cultural issues Growing demand for international travel in
many parts of the world, both developed and
developing nations.
On the other hand, the demand for air travel
may fall if the cost of air travel rises due to
higher taxation on aviation fuel.
Legal issues Risks of legal restrictions, for example
restrictions on pollution levels. Possibility of
increasing security regulations to deal with the
threats from terrorism.
Economic issues The business prospects of airlines will depend
on the condition of the world economy.
Also risks from higher operating costs, for
example higher fuel costs, partly due to
shortages in supply and partly due to higher
taxation.

Political issues Threats from terrorist attacks, making air

travel more dangerous.
Risk of higher taxation on aviation fuel.
Technological issues Need to reduce carbon emissions.
Possibility of using larger aircraft, but with
limited numbers of airports able to
accommodate them.
2.6 PORTER'S DIAMOND

(a) A cluster is a geographic concentration of inter-connected companies,
specialised suppliers and service providers, firms in related industries and
associated institutions (for example universities, standards agencies and
trade associations), all of which operate in a particular industry. These
entities compete, but in many respects they also co-operated with each
other to develop their industry.
The OECD has defined clusters as: Networks of strongly interdependent
firms, knowledge-producing agents (universities, research institutes,
engineering companies), bridging institutions (brokers, consultants) and
customers linked to each other in a value-added production chain.
(b) According to Porters diamond model, the determinants of regional/national
competitiveness in a particular industry are as follows:
(i) Factor conditions. The presence of a pool of highly-specialised
labour skills, technology and infrastructure, tailored to the needs of
particular businesses and industries. Factors are resources human
resources, physical resources, knowledge resources and
infrastructure.
(ii) Demand conditions. The presence of sophisticated and demanding
local buyers/customers.
(iii) Related and supporting industries. The presence of a critical mass
of capable local suppliers and specialised entities that are critical to
innovation (such as research universities).
(iv) Firm strategy, structure and rivalry. The presence of capable and
fiercely-competitive local firms whose strategies drive continual
innovation in the industry.
(v) Government. The existence of strong government policies, and
government initiatives, that support the development of the industry
and also help to create market demand.
A sixth factor is often referred to as chance.
(c) Some ideas are listed below. You might have other items in your list.
Determinant of regional competitiveness
Factor Specialised pools of labour with skills in the industry
conditions Local universities and R&D laboratories that carry on
research into industry-related matters
A waste management infrastructure (for example, the
existence of local facilities for materials reprocessing)
Specialist investors/venture capitalists in the industry

Answers
Determinant of regional competitiveness

Demand Strong demand from industrial customers (for example
conditions water companies) that drives innovation
Heavy demand for waste recycling from local government
authorities
Public sector organisations with green procurement
policies
Strong demand for cleaning up of former industrial sites
Related and The existence of a large number of related manufacturing
supporting industries (in engineering, electronics, plastics and
industries metals)
High quality academic R&D with strong links with firms in
the industry
A strong network of advisers, consultants and
components suppliers
Firm Many competing local suppliers of environmental
strategy, services
structure Strong competition that drives innovation
and rivalry Firms with strong capabilities in the manufacture of
environmental technology
Local firms include leading international companies in the
industry.
Government Government support for environmental industries
Government policy targets for recycling and renewable
energy
Public investment in environmental projects, such as
flood prevention measures
2.7 NETWORK SOLUTIONS PESTEL ANALYSIS
Tutorial note: The suggested answer presented below gives more detail than
would be expected from a candidate under examination conditions.
The answers are intended to provide guidance on the approach required from
candidates, and on the range and depth of knowledge, which could be written by
an excellent candidate.
(a) The PESTEL framework may be used to explore the macro-environmental

influences that might affect an organisation. There are six main influences
in the framework: political, economic, socio-cultural, technological,
environmental and legal. However, these influences are inter-linked. For
example, political developments and environmental requirements are often
implemented through legislation. Candidates will be given credit for defining
the main macro-economic influences that affect NS, rather than the strict
classification of these in the PESTEL framework.
Political
The political environment in which organisations operate is very significant.

Political parties may encourage or discourage economic activity through
taxation policies and legislative programmes.

NS is based in a stable, prosperous country, where successive

governments have valued and encouraged technology. Tax incentives and
grants are given to companies that invest in technology and in research
and development. Tax credits are also provided to companies that invest in
research and development. These incentives are open to NS, its domestic
competitors and its domestic customers. The government has also
promoted the use of technology through a well-publicised awards scheme.
NS is a recent beneficiary of such an award for technological innovation
in data communications.
The scenario suggests that the government itself is a major investor in

communications technology. This technology has to be delivered through
equipment that meets certain standards of reliability and compatibility. The
government has put an approval process in place to ensure such
standards. Such a process should ensure that technically inferior goods do
not make it into the market place.
The current political environment wishes to protect its citizens who are
employees, by enacting legislation concerning employment hours,
conditions and reward.
Economic
The stage or phase of the economic or business cycle clearly affects

customer buying decisions. The case study suggests that 20X4 saw a
downturn in the domestic economy which resulted in a reduction of
customer commitment to long-term investment. Customers may postpone
their buying decisions, although if innovative products bring cost and
communication advantages then they will eventually have to invest in them.
Despite worsening economic conditions, labour costs remain high in

Redland and the company may have to re-consider their commitment to
manufacturing in the country.
Socio-cultural
It appears that electronic communication and information exchange will

continue to increase with implications for companies supplying products
and systems to meet these growing needs. All evidence suggests that the
social use of services on such networks will increase. Hence, although
demand appears to be currently dropping off, new social uses for
telecommunication networks might spark off a new wave of investment.
Technological
Technology is a significant factor in shaping the life cycles of existing

products and the introduction of new ones. The technology sector is
extremely innovative, with new and improved technologies constantly
emerging. NS must scan the external environment for such technologies
and identify how they might affect the future of their current products. NS
must also consider how such emergent technologies might be used in their
own products. The forecast that increased sales will come from currently
installed networks rather than from the installation of new networks is also
relevant here.

Answers
Environmental issues
Green issues have an increasing impact on organisations, particularly in

prosperous developed countries. The reduction of emissions and
improvement of re-cycling are likely to be reflected in socio-cultural trends
and enshrined in legislation. The cost of waste disposal is also increasing.
All these issues combine to increase the costs of manufacture and affect
the competitiveness of the company in its market place.
Legal
NS operates in a country where there are laws defining employer

responsibilities and employee rights. It is likely that such regulation will
continue and NS, like all companies working in Redland, have to evaluate
the benefits and costs of working within such constraints. Some
organisations seek to gain competitive advantage by moving to countries
where regulation is more lax and hence avoid the compliance costs
incurred by their competitors. The scenario suggests that NS has significant
international competitors. It is likely that some of these will be based in
countries where employment and other legislation are less onerous.
Summary
In the context of the scenario, it is political, legal and economic factors that
significantly affect NS. However, as a technology company with significant
investment in research and development, NS must continue to scan the
technological environment to identify trends that could undermine, enhance
or replace their products.
(b) Michael Porter provides, through his five forces framework, a useful way of
analysing the competitive environment of NS. Analysis suggests that the
following key factors are shaping this environment. Other appropriate
models and frameworks could be used and appropriate credit would be
given.
Bargaining power of buyers
NS is competing in two discrete market places. In the data communications

component market it where it has less than 1% of the market share it is, at
best, a supplier of marginal significance. The customers are OEMs, large
industrial buyers who are likely to demand a testing combination of low
prices, high quality and reliability. They are unlikely to tolerate the late
delivery of orders. It appears that alternative sources of supply are readily
available and that switching costs are relatively low. This combination of
circumstances suggests that OEMs have significant bargaining power in
this market place. This is particularly true for the OEM who currently
accounts for 40% of NS current sales.
In the second market place, where network management systems are

supplied to large end users, the buyers appear to have less bargaining
power. NS is catering for each customers specific needs and so each
solution is, to some degree, a bespoke solution. This makes it much harder
for buyers to compare products and prices of potential suppliers, unlike in
the commodity like data communication component market. Alternative
sources of supply are much more difficult to find as there only two or three

companies in this specialist marketplace. Furthermore, the product

purchase is likely to represent a relatively small part of the buyers overall
investment in information and communication systems. Reduced
bargaining power makes this product less price sensitive and so provides
an opportunity to generate good margins. Large international customers are
likely to be cautious about moving to new suppliers.
The bargaining power of suppliers
It seems unlikely that NS will be able to exert much influence on it

suppliers. They are purchasing semiconductors and microprocessors from
major global companies, who probably have well-known and powerful
brands. NS, as a small company, will not have the power to exert buyer
pressure on its suppliers, either in terms of price or delivery. Current
problems associated with the delivery of components are having a
significant impact on the companys ability to meet customer deadlines and
expectations. Clearly an audit needs to be made of supplier performance
and the opportunity, or otherwise, for NS to concentrate on suppliers able
to deliver on time. However, for a small company like NS, the supplier
appears to be in an excellent bargaining position.
If labour is seen as a supplier, then evidence again suggests that NS is in a

relatively weak position. The scenario notes the difficulty of finding high
calibre staff with NSs small size and location making it difficult to attract
the key personnel necessary for future growth.
Threats from new entrants
NS is operating in an industry where the costs of entry are significant

because it is capital and knowledge intensive. NS has shown that there is a
place for smaller innovative companies able to identify and exploit specialist
market niches. Economies of scale compel new entrants to enter at
significant output levels or suffer a cost disadvantage. The products are
complex and there is likely to be a significant learning curve with costs only
falling as volume builds up over time.
The need for government approval of new data communications

components creates an approval process that is both lengthy and
expensive and so creates a significant barrier to new entrants. New
entrants may be discouraged by the uncertainty surrounding the industry, in
terms of technology, user acceptance and the R&D investment necessary
to create components and systems compatible with OEMs equipment and
end user systems. Furthermore, the need to offer comprehensive aftersales
support, although a problem for NS, does also create a significant barrier to
new entrants.
Finally, the exit costs and barriers to exit in the shape of industry-specific
knowledge, skills and assets reduce the attractiveness of the marketplace
to new entrants.
Threats from substitutes
High technology industries are, by their very nature, prone to new

technologies emerging that threaten and then eventually replace the
established technology. Hence it is very important that companies in such

Answers
industries constantly scan the external environment to identify and

anticipate such threats. There is evidence that large, successful, high
technology companies are particularly vulnerable to ignoring the challenge
from disruptive new technologies. However, the small size of the NS may
give it a competitive advantage in its ability to respond quickly and flexibly
to change.
Rivalry amongst competitors
Very different levels of competition are being experienced in the two market
places NS is operating in. Unfortunately the financial data given does not
separate out the revenue and costs for each market place. However, it is
clear that the high-volume, low-margin component business offers intense
competition with buyers who are able to use their size to extract favourable
prices. NS has less than 1% of the home market and there are over twenty
competing suppliers, some of whom have significant international
presence, with a dedicated, geographically distributed support team. The
ability of NS to generate better market share and volumes through product
innovation in this market seems highly unlikely. Competitive rivalry is high
when there are many competing firms and the costs of leaving the industry
are high.
The intensity of rivalry in the network management systems market is

significantly less because there are only two or three competitors in this
specialist market. NS is dealing with a small number of large end users,
designing products specific to their needs. In Porters terms, NS are
adopting a focused differentiation strategy. In these low-volume, high-
margin markers the emphasis has to be on increasing the volume side of
the business, but at the same time making sure that they have the
resources to handle new customers.

CHAPTER 3 COMPETITIVE FORCES

3.1 LIFECYCLE I
a) The dominant characteristics of a company which is in the start-up

stage of its business are:
(i) High financial costs.
(ii) Limited cohesiveness in the senior management team.
(iii) Organizations systems and procedures are not in place.
(iv) Extremely high workload for key personnel with conflicting and multiple
priorities.
(v) Resources are not sufficient to meet multiple demands.
(vi) Relationships with suppliers, customers and other stakeholders are in the
developing stage.
b) The dominant characteristics of a company which is witnessing rapid

and dynamic growth of its existing business are:
(i) New markets, products and technology are being introduced.
(ii) Multiple and conflicting demands for allocation of management, technical
and financial resources.
(iii) Rapidly expanding organizational structure.
(iv) Unequal growth in various sectors within the organization.
(v) Shift in power structures as the organization witnesses expansion in
business.
(vi) Constant dilemma between doing current work and building support
systems for the future.
3.2 LIFECYCLE II
The marketing-mix strategies in different stages of Product Life Cycle should be
pursued on the following lines:
Marketing- Stages
mix
Product Basic Product Product Diversification Phasing out
extension, after- of products of weak
sales service products
and warranties
Price Unit cost, plus Price to Price to meet Reduce price
penetrate competition
market
Distribution Build selected Build intensive Strengthen Eliminate
distribution distribution distribution unprofitable
channels channels network outlets
Sales Heavy sales Reduce effort Increase Reduce cost
Promotion promotion due to increase efforts to to minimum
in consumer promote level
demand brand

Answers
3.3 LIFECYCLE III

Horizon Limited may pursue Promotion Strategies in the marketing of its
consumer durable products in their different stages of Product Life Cycles as
follows:
(a) Introduction Stage
(i) inform and educate the potential customers of the existence of the
product
(ii) encourage trial of product and create awareness of the benefits that
would accrue to the customers by using the product and how it should
be used
(iii) secure distribution in leading retail outlets
(iv) place heavy emphasis on personal selling and promotion in trade
shows and exhibitions.
(b) Growth Stage
(i) stimulate demand in selected market segments and promote the
particular brand as competition increases
(ii) increase emphasis on advertising to capture a large share of the
growing market.
(iii) enter new markets and expand coverage
(iv) identify new distribution channels
(v) shift emphasis from product awareness to the individual firms brand
preference through aggressive advertising.
(vi) Promote differentiation
(c) Maturity Stage
(i) focus on promotion and advertising to persuade the customers to
purchase the particular brand rather than to provide information about
the product
(ii) selective promotion only as intense competition and increase in
promotion expenditures would result in lower profits
(iii) increase R&D budgets to improve product quality vis-a-vis
competitors
(iv) extend product lines to meet niche customer demand.
(d) Declining Stage
(i) reduce promotion expenses as the size of the market is shrinking
(ii) focus of promotion towards reminding remaining customers.
(iii) Rejuvenate old products to make them look new.

3.4 LIFE CYCLE IV

(a) Suggested answer:
Personal Smart cards (in Credit Cheque books
identity cards banking) cards
using iris-
based
technology
3D printers Fourth generation Personal Typewriters
(4G) mobile computers
telephones
Driverless cars E-conferencing E-mails Postcards
Fax messaging
Portable DVD
players
(b) Suggested answer: radio
Basic products have a long-life, and go through periods of regeneration. At
one time, radio was expected to go into permanent decline following the
arrival of television. However, it has been regenerated at various times, by
factors such as radios in cars, local radio stations, digital radio and so on.
Television is another example. Whereas the specific product black-and-
white television is in an advanced stage of decline, televisions themselves
are still in the maturity phase of their life cycle, and continue being
regenerated through innovations such as flat-screen technology, digital
television, edge screens and so on.
3.5 COMPETITIVE FORCES

(a) The factors which have contributed to the increase in importance of
International Trade in the preceding 3-4 decades are:
(i) Reduction in tariffs, quotas, exchange controls and liberalization of
trade and investments have resulted in making the imported products
competitive in local markets.
(ii) Phenomenal improvement in communication and transportation
technologies has resulted in rapid movement of goods and
consequent reduction in transportation costs.
(iii) Development of free-trade zones such as European Union and North
American Free Trade Agreement have resulted in increase in
international trade owing to preferential movement of goods and
dismantling of high tariff regimes.
(iv) Global standardization and worldwide brand building with local
adaption have created significant market opportunities in different
countries.
(v) Substantial expenditures have been incurred on R&D and
standardization of manufacturing and marketing techniques by global
companies in industries such as manufacturing of pharmaceutical
products, energy development, telecommunications, fast food, etc.
and such companies seek opportunities to apportion these costs to
markets in different countries.

Answers
(vi) Important raw material exporting countries now have a growing class
of affluent citizens and foreign residents which have resulted in the
creation of substantial markets for import of vehicles, construction
materials, equipment, edible products and luxury goods.
(b) The Competitive Forces stated by Michael Porter are:
(i) Potential threat of entry of new competitors
(ii) Potential threat of substitutes
(iii) Bargaining power of buyers
(iv) Bargaining power of suppliers
(v) Rivalry among existing competitors
3.6 EXIT BARRIERS

The factors which create Exit Barriers and prevent existing participants from
quitting a loss- incurring industry are:
Substantial Investment in Highly Specialised Fixed Assets:
This is particularly relevant in capital-intensive industries which require very large
investments in specific-purpose building and machinery. These assets do not
have alternative uses and their salvation value is usually low. The substantial
initial capital costs and low salvation value of the assets would result in heavy
losses and create exit barriers.
High Redundancy Costs:
Organizations having a large workforce with high salaries or contracts that
stipulate high redundancy payments have to incur substantial costs by way of
severance payments to its employees to exit from the industry. These payments
require heavy cash outflows and act as exit barriers.
Ancillary Costs of Closure of Business:
The organization may have entered into long-term contractual agreements with
important suppliers or buyers and tenancy agreements carrying substantial
penalties in the event of premature termination of these agreements. The high
costs of premature termination of agreements are exit barriers as the closure of
business would cause huge losses.
High Fixed Operating Costs:
An organization which has very high fixed operating costs and is faced with
unfavourable business conditions may continue operations if it is able to recover
its variable costs fully and a portion of its fixed costs. This is particularly relevant
if the unfavourable conditions are considered to be of a temporary nature and the
firm is optimistic about the prospects of an upturn and recovery from its current
difficulties. This type of composition of preponderance of fixed costs acts as an
exit barrier.
3.7 BOSTON CONSULTING GROUP MATRIX I

The distinctive characteristics of the different types of business divisions in terms
of their relative market positions and pursuit of business strategies are as
follows:
(i) Stars -- Star business divisions have a relatively large share of the
market in high- growth industries and offer lucrative opportunities for
growth and profitability in the long-run. Substantial investment should be

made in Star business divisions to maintain and strengthen their dominant

positions. Strategies of vertical and horizontal integration, market
penetration and product development may be considered to further
consolidate the well-entrenched position of the Star business divisions and
to compete aggressively in the market.
(ii) Cash Cows -- Cash Cows are business divisions which have a relatively
large market share but compete in a low-growth industry. The Cash Cows
are in a position to generate substantial funds because of their strong
competitive position. However, their requirements of funds for expansion
are minimal and they are therefore in a position to generate funds which are
in excess of their requirements. The Cash Cows are milked as a source of
corporate resources for utilization of funds in other business divisions which
offer long-term growth prospects and in which competitive advantages can
be achieved. Quite often the Star divisions with the passage of time are
relegated to the position of Cash Cows.
(iii) Dogs -- Dogs are those business divisions which have a relatively small
share of the market and compete in a slow or no-growth industry. Dog
business divisions are not able to earn fair profits and generally incur
losses. Therefore such divisions are often liquidated or divested or
subjected to policies of retrenchment to curtail expenditures on salaries
and other associated costs. It may not always be advisable to liquidate or
divest the Dog divisions as their assets can be disposed of only at throw
away prices because of the companys weak bargaining position. This
strategy may pay off if there is a business turnaround at a later stage.
3.8 BOSTON CONSULTING GROUP MATRIX II

(a) The BCG matrix is a 2 2 matrix, with one side of the matrix representing
the rate of growth in the market (high or low) and the other side
representing the relative share of the market enjoyed by a firms
product/service.
(b)
Strategy
Low market Cash cow Defend and maintain market share.
growth, high Possibly low spend on R&D.
market Use cash from this product to invest in
share other business units/products.
High market Question The product will need a lot of cash to
growth, low mark increase market share. The strategic
market choice is between investing a lot of cash to
share boost market share or to disinvest/
abandon the product.
High market Star Promote aggressively.
growth, high Invest in R&D.
market Stars should generate enough cash to be
share self-sustaining.
Low market Dog These might generate some cash for the
growth, low business, and if they do, it might be too
market early to abandon the product. The product
share has a limited future, and strategic

Answers
Strategy
decisions should focus on its short-term
future.
There is a danger that the product will use
up cash if the firm chooses to spend
money to preserve its market share.
The firm should avoid risky investment
aimed at trying to turn the business
round.
(c) (i) A high market share is not the only factor that determines the success
of a product.
(ii) The growth rate in the market is not the only indicator of the
attractiveness of a market.
(There is an assumption in the BCG matrix that these are the two key
factors for making strategic decisions about products.)
3.9 PORTERS FIVE FORCES MODEL

(a) The five forces model provides a framework for the analysis of an industry
in which an entity operates. It is an aid to the development of strategies for
the future.
(b) (i) Threat from new market entrants
(ii) Competitive rivalry
(iii) Bargaining power of suppliers
(iv) Bargaining power of customers
(v) Threat of substitutes (also described as threats from product and
technology development)
(c) Some suggestions are given below.
Force Factor affecting its strength
Threat from Ease of entry into the market/strength of barriers to
new market entry
entrants The cost of investing in the industry
The cost of acquiring the knowledge needed to
compete successfully
The availability of routes to market
Geographical factors
Competitive The number and size of firms in the industry
rivalry The size of the industry and growth trends
The fixed and variable cost structures of firms in the
industry
The range of products/services offered
The existence/absence of effective product
differentiation strategies
Bargaining The number of available suppliers
power of The brand reputation of suppliers
suppliers The geographical area covered by a supplier

Force Factor affecting its strength

The importance of product quality/service level quality
The bidding capabilities of suppliers and the bidding
processes used
Relationships with suppliers
Bargaining The number and size of customers
power of The frequency of changing suppliers
customers The cost to a buyer of changing supplier
The importance of product quality/service level quality
Relationships with suppliers; for example just-in-time
supply arrangements
Threat of The existence of substitute products and their
substitutes price/quality
Fashions and trends in customer demand
The strength of patents
Changes in market distribution
Possible consequences of legislation
3.10 FIVE FORCES MODEL OF COMPETITION

(a) (i) Rivalry among Existing Firms
Since companies of equal size and strength are involved in
competition in a market which is not expected to show any growth,
the strategies pursued by any one company can be successful to the
extent that it has competitive advantage over the strategies of its
rivals.
Price competition, campaigns for creation of perceptions of quality
differentiation, more convenient and attractive packaging features and
aggressive promotion would be observed among the competing firms.
(ii) Potential Threat of Entry of New Competitors
Since the market has significant growth prospects and present firms
are earning lucrative profits, there would be a strong attraction for
other resourceful companies to enter this market. Although a new
entrant would have to incur huge research and development costs to
develop the specialised products, yet threats from successful and
experienced companies would always be present.
(iii) Bargaining Power of the Supplier
Lucky Coal Mines is in a strong bargaining position. It can sell its coal
to many other buyers whereas the cement plant would have to incur
high transportation costs - switching costs if it were to procure coal
from other mines which are located at a considerable distance.
Furthermore, the quality of coal from other sources may not be as
suitable for the cement plant. Lucky Coal Mines can therefore dictate
its terms e.g. price, advance payments on placement of orders and
recovery of transportation costs from the cement plant.

Answers
(b) Unique Textile Mills should include the following objectives in its strategic
planning process:
(i) Maintain and consolidate its leadership status as designers and
manufacturers of high fashion fabrics.
(ii) Innovate; Bring new designs in the market well in advance of the
competitors.
(iii) Minimise the time involved in the stages of designing, manufacturing
and marketing of the products.
(iv) Play a pioneering role in introducing the latest technologies and
textile machinery in the country.
(v) New distribution channels: Create a network of company-owned retail
outlets for distribution of exclusive high-value fabrics.
(vi) Reduce the cost of manufacturing and venture into vertical integration
3.11 RAIL SEGMENTS

Possible methods of market segmentation.
(a) Passenger facilities: first class and second class travel
(b) Time: peak time travel, off-peak travel, week-end travel
(c) Freight transport and passenger transport
(d) Commuter travel, business travel, holiday travel
(e) Long-distance travel, short journeys, international journeys
3.12 MARKET SEGMENTATION

Possible methods of market segmentation.
(a) By professional accountancy body
(b) By level or stage in the examinations
(c) By examination paper
(d) Full time student, revision course student, evening class student, weekend
course student
(e) Learning method: face-to-face courses, distance learning, other home
study methods

CHAPTER 4 INTERNAL ANALYSIS

4.1 BENCHMARKING
(a) The purpose of benchmarking is to compare the performance of an entity
(or a product, operation or business unit) against the best in the business
or against expectations. Benchmarking helps to identify weaknesses that
need to be improved.
(b) Internal benchmarking. An entity compares the performance of its
business units (for example, its area offices) against the performance of the
business unit that is considered the best.
Competitive benchmarking. An entity compares its performance and its
products against the best and most successful of its competitors.
Operational benchmarking. An entity compares the performance of a
particular operation, such as handling customer enquiries, or warehousing
and despatch, against the performance of a similar operation in a different
entity. This different entity is not a competitor; this means that the
benchmarking often involves collaboration between the two entities.
Customer benchmarking. A slightly different type of comparison. An entity
compares its performance against what its customers expect the
performance to be.
4.2 ADDED VALUE I

(a) Added value is the net extra benefit obtained from doing something or by
adding an extra feature to a product or service. Ideally, it should be
measured as a monetary value, being the extra sales value from the item
minus the extra costs of doing it or providing it (although value cannot
always be measured easily in monetary terms).
(b) Value is added or should be added in all parts of the value chain.
The writer John Kay argued that adding value is the central purpose of
business activity.
Value can be added by developing core competencies that provide an
entity with a competitive advantage.
Competitive advantage is achieved through innovation, reputation and
organisational structure.
4.3 ADDED VALUE II

The farm appears to have added value in the following ways:
(a) It has switched to organic farming. Some customers are prepared to pay
more for organically-produced items, partly because organic products may
be considered more healthy and partly because customers may want to
buy produce of animals that have been well-treated.
(b) It has increased the range of products that it makes and sells.
(c) It has created a brand for their product: branding can add value.
(d) It has developed a direct marketing capability, which presumably includes a
potential customer database and an e-commerce facility.
(e) It has developed a direct mail gift product.

Answers
4.4 VALUE CHAIN

(a) Value chain activities
Primary activities Secondary activities
Inbound logistics Procurement
Operations Human resource management
Outbound logistics Technological development
Marketing and sales Infrastructure (general management, accounting
etc.)
Service (after sales)
(b) Companies compete with each other, and their relative success depends
on their ability to add value throughout their value chain.
Companies should try to develop strategies that add value. They should
look at each activity in the value chain and consider whether it can be
improved to add more value.
A company can also assess its performance by looking at its ability to add
value in each part of the value chain (each primary activity and each
secondary activity).
(c) Primary activities:
(i) Publisher or author thinks of the idea for a book. The material is
written or assembled.
(ii) The publisher edits what the author has prepared.
(iii) The text is prepared for printing
(iv) Printing
(v) Warehousing and distribution of books
(vi) Sale of books to intermediaries (bookshops) or direct (schools,
colleges and universities
After-sales service: taking back returned (unsold) copies
(d) Primary activities
Inbound Operations Marketing and After-sales
logistics sales service
Managing Taking calls Obtaining Handling claims
incoming calls: customer
call systems information
Providing price Targeting Detecting
quotations customers fraudulent
quickly claims
Cheap prices for Advertising and Settlement of
insurance other forms of successful
policies marketing claims

4.5 MODELLING, MEASURING, TARGETING

(a) (i) Value chain analysis
(ii) PESTEL analysis
(iii) Five forces model
(iv) SWOT analysis
(v) Lewins three-step change model (or Gemini 4Rs)
(b) Measures to assess the effectiveness of marketing might include:
Growth in sales or total sales
Market share or change in market share
Sales revenue per Rs.1 of marketing spending
Sales revenue per Rs.1 of advertising spending
Sales revenue per Rs.1 of sales promotion spending
However, marketing activity is not always aimed at achieved more sales. In
the early stages of a products life, marketing is necessary to create
awareness of the product.
It may therefore be appropriate to assess the effectiveness of marketing by
trying to measure changes in customer awareness, for example using
customer surveys and market research.
For marketing by website, the effectiveness might be assessed by
measuring the number of hits on the website every week or every day.
(c) Critical success factors might be:
reducing the number of cars coming into the city during the day
increasing the amount of bus and taxi lanes.
Strategies for achieving success
introduce a congestion charge on all private vehicles entering the
city at certain times of the day
increasing the number and length of bus and taxi only lanes.
Key performance indicators might therefore be:
a target for a reduction in the number of cars entering the city during
the day
a target for an increase in the number/length of bus and taxi lanes.
Other answers might be equally acceptable. This answer is based on the
experience of London.
4.6 CORE COMPETENCE

(a) A core competence is something a company does especially well [in
comparison with] its competitors A core competence refers to a set of
skills or experience in some activity, rather than physical or financial
assets.
Strong core competencies come from:
(i) well-organised special skills, knowledge, expertise, ownership or use
of technologies, processes or abilities

Answers
(ii) which are typically achieved or acquired through long-term

development and experience.
A core competence creates value for the customer because the customer
considers it to be unique and distinguishable, and something that rival
suppliers cannot provide.
A core competence is difficult for competitors to imitate.
An important strategic consideration is that a company should be able to
transfer its core competencies to other products and markets.
(b) Suggestions
(i) Sony has a core competence in miniaturisation.
(ii) Microsoft has a core competence in developing user-friendly software
products.
(iii) Federal Express has core competencies in logistics and customer
service.
(iv) Honda has core competencies in small engine design and
manufacture.
(Note: These core competencies do not specify particular products. The
competencies could be transferred to a range of different products and
markets.)
(c) The significance of core competencies is that they can be used by a
company to achieve long-term (sustainable) competitive advantage in ever-
changing markets.
4.7 SWOT ANALYSIS I

(a) The purpose of SWOT analysis is to carry out an analysis of the strategic
position of an entity, through an assessment of its internal strengths and
weaknesses, and the threats and opportunities in its environment. It can be
used as a basis for developing strategies for dealing with risks or exploiting
opportunities and strengths.
However, it is not a tool for evaluating and prioritising strengths,
opportunities, weaknesses and threats.
(b) SWOT for Righton Supermarkets Group:
Strengths Weaknesses
Profitability No weaknesses are apparent in
Growth in non-food business the information provided.
Large and increasing market share
Reputation for low prices and
reasonable quality
Reputation for good service
Opportunities Threats
Continuing growth in the size of the High investor expectations about
market future performance
Further out-of-town and in-town Activities of competitors
expansion Possibility of government action
against monopoly position

4.8 SWOT ANALYSIS II

(a) Suggested answer
Strengths Weaknesses
Large continuing investment in R&D Operations are based in Western
Europe and North America: high
labour costs compared to
competitor companies?
Clinical failure of new drug
Opportunities Threats
Opportunities for growth in the Public concerns about the safety
market for pharmaceutical products of new drugs
outside North America and Western Concerns about the regulation of
Europe? drugs and about regulatory
Establish operations in other decisions by national authorities
countries: lower labour costs, but are
the skills available?
(b) AZ Group could look for future growth in its markets outside North America.
If these markets grow, there will be opportunities for switching production
facilities to these countries to reduce costs.
4.9 SWOT ANALYSIS III

Strengths
Strong brand and reputation
Worldwide facilities for manufacture and distribution
Managers with ideas for improving the business
Successful experience with EDI
Successful experience with website and e-commerce.
Weaknesses
Poor communications between divisions within the company
Little or no access to information about competitors
Possibly the decentralisation of IS/IT systems is a weakness.
Opportunities
Possible use of intranet to improve internal communications and
interchange of ideas
Possible use of extranets to improve communications with customers
Possible use of an executive information system to provide more
information about competitors and the market.
Threats
Strong competition in the market. Competitors have made some successful
initiatives.
Significant fall in number of hits on the website.

Answers
CHAPTER 5 COMPETITIVE ADVANTAGE

5.1 FRANCHISING
(a) In a Franchise Arrangement, one business entity who is the franchisor
grants a license to another business entity called the franchisee to use the
name and brand/trademark of the franchisor and conduct the business
according to the tested processes, methods, administration and marketing
techniques developed by the franchisor.
(b) SRL would be able to gain the following advantages of entering into a
franchise arrangement with Oriental Resorts Inc.:
(i) The franchisee is able to make investment in a proven business
format and can eliminate the risks and difficulties of establishing a
completely a new business.
(ii) The franchisee can use a well-known brand name which is promoted
aggressively and has wide customer acceptance.
(iii) The franchisee receives guidance and advice on selection of a
suitable project design and equipment according to the pre-tested
specifications of the franchisor.
(iv) The franchisee can concentrate wholly on the day-to-day operations
of the business as the responsibilities of purchasing stocks, staff
training, marketing and advertising are handled by the franchisor.
(v) The franchisee can seek managerial advice and guidance to
overcome any problems which he may encounter in the business.
5.2 INTERNATIONAL ALLIANCES

(a) The expected advantages of participation in the Trade Fair are:
The Trade Fair can serve as a vehicle for securing orders for the
Companys products.
The Trade Fair can create awareness of the products among the
prospective customers.
The participants in the Trade Fair from other countries may show
interest in the products which may lead to sales and joint ventures in
these countries.
The Trade Fair may lead to contacts and opportunities for
appointment of agents and distributors in Sri Lanka.
(b) The reasons for entering into international alliances are:
To gain access to foreign markets.
To effectively utilise complementary technologies.
To co-operate to reduce research costs.
To minimise risk for any individual participant.
To take advantages of firms with different skills and abilities.
To avoid ownership of overseas operations.

Examples of industries in which International Alliances are common:

Pharmaceutical Industry --- to reduce research costs and use
complementary skills.
Manufacture of computers and electronics --- to utilise
complementary manufacturing facilities and skills.
Airline Industry ---to share passenger load and utilise available
capacity.
5.3 COMPETITIVE STRATEGIES

(a) Cost Leadership is a strategy that seeks to establish long-term competitive
advantages by emphasizing that value chain activities can be achieved at
costs which are substantially below what competitors are able to match on
a sustained basis. This allows a firm to compete primarily by charging a
price lower than the competitors and still earn satisfactory levels of profits.
(b) A Product/Service Differentiation Strategy is a strategy which promotes and
emphasises that the product/service offered by the firm is different from
other available products/services of a similar nature. The differences are
based on certain desirable features and performance attributes and
therefore the high prices are justified.
(c) The capabilities which are most important for the success of a
Product/Service Differentiation Strategy are:
(i) Strong and functional research and development department, able to
correctly anticipate and assess the consumer behaviour and desire.
(ii) Strong coordination between research and development, Marketing
and Technical departments.
(iii) Innovative Management allowing better ideas to be cultivated.
(iv) Deep insight of the market and close association with the distribution
channels.
(v) Strong brand name.
(vi) Strong connection and cooperation from well-established vendor
network.
(vii) Capital Allocated for attracting technical and creative human
resources enabling ability to create a unique value/attribute that is
hard to copy by competitors.
(viii) Protection of research should be available in order to ensure that
resources are not imitated.
5.4 DIFFERENTIATION STRATEGY

(i) In a Differentiation Strategy, the firm is in a position to provide a
product or service which the customer perceives to be of a higher
value than those offered by other competitors. The customer
considers that the additional cost of purchasing the particular product
or service is well below what the product or service is worth as
compared to the other available alternatives.
(ii) The types of skills and resources which are critical for the pursuance
of a successful Differentiation Strategy are:

Answers
Strong marketing capabilities, including support of marketing

channels.
Sound capabilities for research and product engineering.
Corporate reputation for technical and professional leadership.
Good reputation for high standard of products and consistent quality.
Strong relations with the suppliers of major inputs and services.
Tradition of positive and prompt response to customers queries.
Incentives based on subjective measures
Stress continuous improvement and innovation
5.5 COLLABORATION
Rival firms may collaborate in any of the following ways.
(a) Firms may form a price cartel, to sell their products to the market at the
same price. Cartels may be illegal.
(b) Firms may co-operate to promote the interests of their industry as a whole;
for example firms may collaborate through trade associations or
professional associations.
(c) Rival firms may form a joint venture to undertake a high-risk project.
(d) When there are only two firms in an industry (when there is an oligopoly),
the firms may avoid competing with each other, particularly on price, and
are content to hold on to their existing share of the market. Non-competition
allows oligopolies to maximise their profitability.
5.6 SUSTAINABLE COMPETITIVE ADVANTAGE

A company can achieve sustainable competitive advantage by:
(1) choosing a suitable strategy cost leadership, differentiation or focus
(2) sustaining the strategy by
building up core competencies (special skills, experience, and so on)
marketing expertise and
new investment.
5.7 PORTERS GENERIC STRATEGIES

(a) Cost leadership. Trying to gain competitive advantage by being the
cheapest producer in the market may be found in business-to-business
markets, such as the supply of raw materials and component parts. The
customer tries to buy cheaply in order to keeps its own production costs
down. However, in theory, only one firm in any market (or niche market)
can be the least-cost producer: other companies need to adopt product
differentiation strategies.
Examples of cost leaders include Wal-Mart and Aldi.
(b) Differentiation. Forms often compete in a market by differentiating their
products from the similar products of competitors. The basis for
differentiation is often product design (television sets, items of furniture,
clothing, mobile telephones and so on). Other product features or
marketing methods (advertising, or the selection of a different channel of
distribution) might also be used to create differentiation.

Examples of differentiators include McDonalds and Audi.

(c) Focus. Many companies focus on a particular niche of a market. Within its
chosen niche, the company needs to pursue a cost leadership or a product
differentiation strategy. For example, within the broader market for hi-fi
systems and sound systems, a company might specialise in providing
headphones and speaker systems.
Another example of a focus strategy is PepsiCo.
5.8 MARKET NICHE

In the tourism industry, a market niche might be identified according to the type of
holiday preferred by particular groups of customer. If so, niche markets in tourism
could be (for example):
(1) City break holidays
(2) Golfing holidays
(3) Walking holidays
(4) Sailing holidays
(5) Sight-seeing holidays/culture holidays
(6) Skiing holidays

Answers
CHAPTER 6 METHODS OF DEVELOPMENT

6.1 EXPANSION STRATEGIES
(a) Organic/internal growth is a strategy to achieve growth by expansion in the
companys own line of products and market portfolio. It relates to increasing
the market share in the existing market or entering new markets by bringing
high value products.
Acquisition strategies involve expansion by way of purchase of controlling
interest in another existing company.
The key differences between the two strategies are as follows:
(i) In internal growth strategy, expansion is achieved in a steady and
planned manner extending over a phase-wise schedule, whereas in
an acquisition strategy, rapid expansion is achieved through
acquisition of existing assets of another company.
(ii) In expansion by internal growth, the success of the strategy is
dependent, to a considerable extent, on the managements ability to
formulate and implement sound plans, whereas in growth by
acquisition, the success of the strategy is also linked with
achievement of corporate, business and operational level synergies.
(iii) In a strategy of internal growth, the level of competition can become
more intense, particularly if there are relatively few strong players, but
in expansion by acquisition the level of competition may be reduced
by acquiring a rival competitor.
(b) A company may pursue a policy of growth by organic/internal expansion
and not through acquisition for the following reasons:
(i) Expansion of its physical infrastructure and facilities can be planned
more efficiently to fulfil the organizational requirements. In case of
acquisition, the company would have to utilise the existing sites and
facilities which may not be the most suitable option for its
requirements.
(ii) The cost of acquisition of an existing company may be much higher
than the cost of expansion of assets through internal growth.
(iii) Often, acquisitions require substantial investment outlays and the
acquiring companies resort to heavy borrowings which may extend
financial leverage beyond prudent limits.
(iv) In acquisitions, a company acquires functions of other companies
which may result in duplication of facilities or redundancies which
ultimately results in lowering of employees morale.
(v) Human Resources can be utilised more effectively and with a greater
degree of cohesion of corporate culture by adopting strategies of
organic growth. Also, in the case of organic growth, better career
development opportunities are provided to the employees. In case of
expansion by acquisition of other businesses, the company usually
has to acquire and assimilate the staff of those businesses.

6.2 MARKET PENETRATION STRATEGY

The incoming Marketing Director of DCL may pursue the following Marketing
Penetration Strategies to increase the Companys annual sales from Rs 600
million to Rs 1200 million in the next 3 years.
(a) Pricing: DCL should reduce its prices to achieve a larger share of the
growing market. This strategy would be particularly rewarding as the
target market for children is assumed to be highly price sensitive and
will result in substantial increase in the sales revenue. Besides, DCLs
average cost would decline with increase in production and better
utilization of existing capacity. Pursuance of this pricing policy would
therefore contribute towards increase in sales revenue as well as overall
profitability of DCL.
(b) Increase in Promotion and Distribution Support: DCL should launch
well-conceived advertising and promotion campaigns to attract those
segments of the market in which its products are not consumed at present.
It would also be necessary to identify and appoint competent new
distributors who would aggressively promote DCLs products. DCL should
provide support to the retailers by way of prizes and gifts for distribution
among the children and also sponsor special events to increase awareness
of its products in the target market. DCL might have to explore both the
push and pull marketing strategy along with media advertising.
(c) Product Modifications: DCL should introduce further product
improvements and change design features from time to time to make the
products more attractive for the children. This strategy would enable DCL
to gain a larger share of the market as the consumers would increase
the frequency of their purchases.
(d) Incentives to Marketing Staff: DCL should offer performance related
incentives and special benefits to the marketing staff who are able to
achieve and exceed the sales targets given to them.
(e) Market Development: DCL should introduce its products in new
geographic areas besides Karachi which offer good opportunities of
achieving larger share of the market and increase in sales revenue.
6.3 GROWTH STRATEGIES

(a) Horizontal Integration Strategy:
This strategy seeks to achieve growth by ownership/acquisition or merging
of functions of organisations which operate on a similar level. It is
characterised by integration of firms producing the same kind of goods or
operating at the same stage of the supply /value chain. This strategy is
pursued to achieve economies of scale by sharing of resources and
competencies to gain significant competitive advantages.
Example: A profitable cement company acquiring another cement
manufacturing unit.
(b) Forward Integration Strategy:
It is a strategy which envisages gaining ownership or taking control of
distribution channels when the existing external distribution channels insist
on unduly high profit margins or are unreliable or are unable of meeting the
firms distribution objectives.

Answers
Forward Integration strategy is most beneficial when significant competitive

advantages can be achieved through ownership or effective control of the
distribution channels. The firm must have sufficient capital and human
resources for pursuing a successful forward integration strategy.
Example: A leading manufacturer of branded fashion clothing establishing
its own network of retail outlets.
(c) Conglomerate Growth Strategy:
This strategy seeks to create diversified business units/entities, each of
which is capable of achieving excellent financial performance in its
respective line of business. Firms which pursue conglomerate growth
strategies search across different industries for opportunities for expansion
and purchase of companies whose assets are undervalued and therefore
can be acquired at low prices, yet have the potential to offer high returns on
the investment. Firms which have excellent top management capabilities
and can effectively plan, manage and control individual units in different
industries pursue conglomerate growth industries.
Example: A prominent textile group establishing or making acquisition of a
power generation unit.
6.4 MERGERS AND ACQUISITIONS

The principal objectives of mergers and acquisitions of financially strong and
well- established international corporations are as follows:
(i) To gain access to strategic proprietary assets/technical know-how and
exploit these strengths with greater effectiveness.
(ii) To gain market power and dominance, including access to strong
distribution channels in expanding and lucrative markets.
(iii) To achieve synergies in domestic and global operations across different
industries which offer complementary advantages.
(iv) To expand the size of operations to obtain advantages of economies of
scale and achieve competitive advantages in negotiations with suppliers,
customers and financial institutions from a position of greater strength.
(v) To diversify operations and spread risks over a more wide area.
6.5 DIVESTMENT STRATEGY AND BENCHMARKING

(a) There are several academic models that could be applied to analyse this
situation. Two of the most widely used models refer to the product life cycle
and the Boston Consulting Groups (BCG) growth-share matrix. It is on
these two that this suggested answer will concentrate.
It is obvious that Granville Holdings plc has allowed its range of products to
grow without too much regard to the overall efficiency and effectiveness of
the product spread. It is required that a more rational approach should be
taken so as to rationalise the product portfolio.
The product life cycle can be used to assess where each of the products is
located. Some products, in their introductory stage, may not be contributing
well to overall profits because of initial research and market development
costs but might in future provide a regular stream of income to the
company. Those in the growth stage should already be profit providers. It is
in the later stages of the life cycle that attention needs to be paid.

In the maturity/saturation stages it may be prudent to assess whether there

is any long-term future in the products. Would investment in alternative
products be more sensible? This question is more critical for products in the
decline stage. It must be asked whether withdrawing these products would
be advisable. Products can still be profitable in the decline stage,
particularly if competitors are leaving the market faster than market demand
is falling.
It is also important to assess how these products contribute to the overall
performance of the company. Withdrawing a product might annoy key
customers. The products might also provide a complementary range and
withdrawal of one product might adversely affect samples of other products.
It is also important to assess how costs such as marketing, distribution and
even manufacturing have been allocated. The withdrawal of certain
products could result in others having to share and carry higher costs, so
making them price uncompetitive. Product rationalisation programmes
should not be undertaken without considering the consequences of such an
action.
The BCG growth-share matrix examines the inter-relationships between
market share and market growth of given products. It assesses resource
generation alongside resource needs.
The cash-cow, described as such because products in this criteria (low
growth and high market share) are usually very profitable and generate
surplus funds and so are often used to finance other developments. Such
products are not recommended for deletion.
The stars generate high revenues because the products have high market
shares, but because the market is growing fast investment in such products
must be high to maintain their market position. These products are unlikely
to be highly profitable as yet, but decisions to withdraw such products
should be rejected. It is likely that such products will become more
profitable as the market develops further.
The problem child or question mark product is probably currently losing
money. A prognosis needs to be made of future movements. Can the
product achieve a significant share of the market? If the assumption is
positive, then the product may proceed to become a star and later a cash
cow. However if there are considerable doubts the product may have to be
withdrawn.
It is often assumed that dogs products with low market share and low
growth potential should be withdrawn from the market place. However
some dogs occupy a niche position and are still capable of returning a
profit. If this is the case then they can be persevered with until such times
as they have little to offer the company.
However, loss making dogs need to be abandoned. They consume too
much management time and money. These need to be focused on present
and future winners.
Chris Button needs to be careful which products to remove from the
portfolio. Some rationalisation will be needed, but this should be carried out
carefully and not rushed into.

Answers
(b) Benchmarking the Granville organisation will enable Chris Button to

assess in which areas the performance of his company falls short of that of
his competitors and can help determine what action needs to be taken to
correct any adverse findings.
There are several ways in which benchmarking can be carried out.
Internal benchmarking can compare different units within Granville
Holdings plc. Some centres may be more proficient than others and a
transfer of knowledge and skills could be beneficial to the group as a
whole.
Competitive benchmarking attempts to compare products,
processes and results and show where the company is failing with
reference to those of competitors. The difficulty here is accessing
confidential data of competitors. They are not going to make it easy
for Granville by providing them with this information.
Customer benchmarking attempts to compare corporate
performance with the performance expected by customers. How far is
there a gap between expected performance and actual?
Generic benchmarking compares similar business functions
between companies operating in different industries. For example,
how do financial results gearing, liquidity, etc. compare in differing
industrial sectors?
Process or activity benchmarking attempts to identify the current
best practice within an organisation (regardless of sector) for activities
such as manufacturing, engineering or human resource management.
Then this best practice can be imported into the Granville
organisation, assuming compatibility.
There are a number of limitations associated with benchmarking. Can
relevant data be obtained to make any comparison meaningful? Some of
the comparisons may be meaningless. Circumstances between firms,
environments and products all differ, so making a comparison appear like
comparing apples with oranges. The process can appear to be an
historical exercise. Circumstances change, and what was acceptable
yesterday may be out of date tomorrow.
Furthermore there is an implicit assumption that there is an optimum
solution. A process can be efficient but does it add value is it effective? It
is possible that distribution costs can be reduced to almost zero by
distributing nothing. Is this solution useful? If benchmarking concentrates
on efficiency, ignoring effectiveness, then it is missing its purpose.
Reed could utilise benchmarking to assess the corporate performance of
the company, but this needs to be implemented carefully and results must
be analysed critically without hasty judgements being made.
6.6 PRODUCT MARKET STRATEGIES

Market penetration Increase market share
Product Market the installation of satellite dishes to the existing
development customer base
Market development Expand the business into another area of the city
Diversification Start up a new business operation by offering office
cleaning services

6.7 SUITABILITY, ACCEPTABILITY AND FEASIBILITY

Suitability Does the strategy deal with the position or circumstances
the entity is facing.
Does the strategy make sense in these circumstances?
Does it deal with the problem?
Alternative strategies can be raked according to their
suitability. Some will deal with the problem more effectively
than others.
Acceptability Is the strategy acceptable in terms of its expected outcome
(for example, is the risk/reward pay-off acceptable to
shareholders?)
Feasibility Does the entity have the competencies and the resources to
deliver the strategy and make it work?
6.8 SMILE-SWEET
(a) The product is in the growth stage of its life cycle.
(b) When the patents expire, competitors will inevitably enter the market, and
the ability of Smile-sweet to charge monopoly prices will end. Profitability
will fall dramatically
(c) Smile-sweet should make every effort to enforce its patents, and must not
allow the US competitor to breach its patent rights.
However, it is not clear whether the patent rights will be sufficient to prevent
the US competitor from entering the market in a few years time. Smile-
sweet must therefore develop alternative strategies, to give it a competitive
advantage over competitors when they eventually get into the market.
These strategies should include:
(i) improving the efficiency of operations
(ii) developing the brand name for its product
(iii) investing in larger and more efficient production facilities
(iv) make sure that supply can meet demand.
6.9 ENVIRONMENT MANAGEMENT SOCIETY

Context
The decline in the number of people taking the qualification appears to be a
reflection of the maturity of the marketplace. The large pool of unqualified
environmental managers and auditors that existed when the qualification was
launched has now been exploited. There are now fewer candidates taking the
examinations and fewer members joining the EMS. The organisations response
to this has been to look for international markets where it can promote the
qualifications it currently offers. It hopes to find large pools of unqualified
environmental managers and auditors in these markets.
The scenario suggests that EMS currently has relatively limited strategic
ambitions. There is no evidence that EMS plans to develop new qualifications
outside its current portfolio. Indeed, attempts to look at complementary
qualifications (such as soil and water conservation) have been rejected by
Council. Hence, expansion into new strategic business markets does not appear
to be an option.

Answers
Strategy Development
(a) Internal development
Internal development takes place when strategies are developed by
building on or developing the organisations own capabilities. It is often
termed organic growth. This is how EMS has operated up to now. The
original certificates were developed by the founders of the Society. Since
then, additional certificates have been added and the Diploma programme
developed at the instigation of members and officers of the Society.
In many ways this type of organic growth is particularly suited to the
configuration of the organisation, one where there is a risk-averse and
cautious culture. The organic approach spreads cost and risk over time and
growth is much easier to control and manage. However, growth can be
slow and indeed, as in the case of EMS, may have ceased altogether.
Growth is also restricted by the breadth of the organisations capabilities.
For example, EMS has not been able to develop (or indeed even consider
developing) any products outside of its fairly restricted product range.
Furthermore, although internal development may be a reasonable strategy
for developing a home market it maybe an inappropriate strategy for
breaking into new market places and territories. This is particularly true
when, as it appears in the case of the EMS, internal resources have no
previous experience of developing products in overseas markets.
In summary, internal growth has been the method of strategy development
at EMS up to now, based on a strategic direction of consolidation and
market penetration. There is no evidence that EMS is considering
developing new products to arrest the fall in qualification numbers.
However, the Board has suggested developing new markets for the current
qualification range and India, China and Russia have been identified as
potential targets. It seems unlikely that internal development will be an
appropriate method of pursuing this strategic direction.
(b) Mergers and Acquisitions
A strategy of acquisition is one where one organisation (such as EMS)
takes ownership of other existing organisations in the target countries. One
of the most compelling reasons for acquisition is the speed it allows an
organisation to enter a new product or market area. EMS might look to
acquire organisations already offering certification in its target markets.
These organisations would then become the mechanism for launching EMS
qualifications into these markets. In addition, it is likely that these
organisations will have qualifications that the EMS does not currently offer.
These qualifications could then be offered, if appropriate, in EMSs home
market. This arrangement would provide EMS with the opportunity to
quickly offer its core competences into its target markets, as well as gaining
new competencies which it could exploit at home.
However, acquisitions usually require considerable expenditure at some
point in time and evidence suggests that there is a high risk that they will
not deliver the returns that they promised. It is unlikely that the EMS will
have enough money to fund such acquisitions and its status as a private
limited entity means that it cannot currently access the markets to fund
such growth. Any acquisitions will have to be funded from its cash reserves
or from private equity investment groups. Furthermore, acquisitions also
bring political and cultural issues which evidence suggests the organisation
would have difficulty with. Under achievement in mergers and acquisitions
often results from problems of cultural fit. This can be particularly

problematic with international acquisitions, which is exactly the type of

acquisition under consideration here. So, although acquisitions are a
popular way of fuelling growth it is unlikely that EMS will have either the
cash or the cultural will to pursue this method of strategy development.
There is no evidence that EMS has any expertise in acquiring organisations
in its home market and so such acquisitions overseas would be extremely
risky.
(c) Strategic Alliances
A strategic alliance takes place when two or more organisations share
resources and activities to pursue a particular strategy. This approach has
become increasingly popular for a number of reasons. In the context of
EMS it would allow the organisation to enter into a marketplace without the
large financial outlay of acquiring a local organisation. Furthermore, it would
avoid the cultural dislocation of either acquiring or merging with another
organisation. The motive for the alliance would be co13 specialisation with
each partner concentrating on the activities that best match their
capabilities. Johnson, Scholes and Whittington suggest that co-
specialisation alliances are used to enter new geographic markets where
an organisation needs local knowledge and expertise. This fits the EMS
requirement exactly.
The exact nature of the alliance would require much thought and indeed
different types of alliance might be forged in the three markets targeted by
EMS. A joint venture is where a new organisation is set up jointly owned by
the parents. This is a formal alliance and will obviously take some time to
establish. EMS will have to contribute cost and resources to the newly
established company, but such costs and resources should be much less
than those incurred in an acquisition. However, joint ventures take time to
establish and it may be not be an option if EMS wants to quickly move into
a target marketplace to speedily arrest its falling numbers.
A licence agreement could be an alternative where EMS licenses the use of
its qualification in the target market. This could be organised in a number of
ways. For example, a local organisation could market the EMS qualification
as its own and pay EMS a fee for each issued certificate and diploma.
Alternatively, the qualification may be marketed by the local organisation as
an EMS qualification and EMS pays this organisation a licence fee for
every certificate and diploma it issues in that country. This requires less
commitment from EMS but it is likely to bring in less financial returns, with
less control over how the qualification is marketed. Furthermore, if the
qualification is successful, there is the risk that the local organisation will
develop its own alternative so that it gains all the income from the
transaction, not just a percentage of the transaction fee.
At first sight, the strategic alliance appears very appropriate to EMSs
current situation. The licensing approach is particularly attractive because it
seems to offer very quick access to new markets without any great financial
commitment and without any cultural upheaval within EMS itself. However,
the uptake of the qualification is unpredictable and the marketing and
promotion of the qualification is outside the control of EMS. EMS may find
this difficult to accept. Furthermore, the EMS will only be receiving a
fraction of the income and so it must ensure that this fraction is sufficient to
fuel growth expectations and service the newly qualified members in other
countries.

Answers
Finally, there is often a paradox in organisations where internal

development has been the strategic method adopted so far. An
organisation used to internal development and control often finds it difficult
to trust partners in an alliance. Yet trust and cooperation is probably the
most important ingredient of making such strategic alliances work.
6.10 LICENSING
Companies enter into Licensing Arrangements with overseas companies
instead of direct exporting to obtain the following advantages:
(i) Direct Exporting may be unattractive because of tariffs, quotas or other
import restrictions in overseas markets.
(ii) Licensing may allow fairly rapid penetration of overseas markets.
(iii) Licensing does not require substantial financial resources.
(iv) Political risks are reduced since the licensee is likely to be a local company.
(v) Local production may be the only feasible option in the case of bulky
products such as cement and flat glass.
6.11 SCENARIO PLANNING

Scenario Planning is a technique which involves the process of identifying
alternative scenarios in the future, and on the basis of different assumptions that
the strategists may anticipate in the future, formulate corporate strategy. The
process of scenario planning on the basis of different assumptions enables the
company to realign its corporate strategy quickly in the changing business
conditions. The purpose of scenario planning is to avoid formulating corporate
strategy on the basis of a single future outcome which may not materialise.
Rather, the objective is to re-evaluate the relevance of the strategic objectives
which would be valid for different outcomes/events as they unfold from time to
time.

CHAPTER 7 STRATEGY IMPLEMENTATION

7.1 CENTRALISED DECISION MAKING I
The major difficulties expected to be faced by the parent and subsidiary
companies in pursuing a highly centralised financial policy are:
(i) The staff at the parent company would not be fully conversant with the
local rules and regulations in Pakistan.
(ii) The operations of the subsidiary may suffer due to delays in the
decisions by the parent company resulting in higher costs and
inefficiencies.
(iii) The executives at the parent company would be overburdened as they
would have to take numerous decisions pertaining to the subsidiary.
(iv) The morale and initiative of the local staff may be affected as they would
have to obtain approvals for decisions which can be taken here readily by
responsible officers.
(v) The overall costs would increase considerably due to duplication of work
and additional traveling and incidental costs.
7.2 CENTRALISED DECISION MAKING II

The factors responsible for the MNCs policy of close control and centralised
decision making for the subsidiary companies are:
(i) Large size of the subsidiary companies and Substantial Capital Investment
- Due to the large size of the individual entities and substantial investment
of the MNC in the subsidiary companies, their performance can have far-
reaching implications on the financial standing and profitability of the MNC.
(ii) Access to technology and manufacturing process - The manufacturing
process in the subsidiary companies involves sophisticated technology
which has been developed by the MNC at a very high
R&D cost. The technology is closely-guarded and the parent company
wants to ensure maximum security and confidentiality of this technology.
(iii) Operations of the subsidiary companies are closely integrated and inter-
dependent - The operations of the subsidiaries are closely integrated and
interdependent and unsatisfactory performance of any one company can
have adverse impact on the performance of other group companies,
including the MNC itself. There is therefore the need for more centralised
control and supervision of the subsidiaries.
(iv) Stringent Targets - If the products manufactured by the subsidiaries have to
conform to stringent quality control requirements stipulated by the parent
company or if the operations are of a highly environmentally sensitive
nature, then the parent company would want to exercise more close control
of the subsidiary companies. Any lapse or mishap by the subsidiary can
have far-reaching adverse impact on the standing and reputation of the
parent company.

Answers
7.3 CENTRALISED DECISION MAKING III

The MNC seeks to obtain the following advantages by pursuing a centralised
financial decision making policy:
(i) The parent Company has superior fund management skills which are not
available in the subsidiaries.
(ii) The risks of losses on account of devaluation in the currency of the host
countries are minimised.
(iii) The funds can be promptly invested in avenues which offer optimal returns.
(iv) The risks of expropriation of funds by the governments of the host countries
are reduced considerably.
(v) The pooling of funds can help to implement a more coordinated and
effective overall fund management strategy.
(vi) The parent company can obtain facilities on more favourable terms from
the bankers due to the substantial size of the pooling of funds.
7.4 STRATEGY FORMULATION AND STRATEGY IMPLEMENTATION

(a) Strategy formulation policies can be successful only if the strategic plans
are implemented effectively by converting the plans into well-conceived
actions designed to achieve the objectives of the organization. Strategic
plans and strategy implementation have to be synchronised to perform in
close interaction to achieve optimum results.
(b) The essential elements which should be considered by the management of
PPSML for creating good relationship between formulation of strategic
plans and strategy implementation are:
(i) Organizational Structure: Organizational structure creates the
formal pattern of interactions and coordination amongst the
management, supervisors and workers to link the tasks and efforts
of the individuals and groups to implement and achieve the strategic
plans. The management should ensure that the Organization
Structure is suitably integrated for achieving harmony among the
various functions and greater co-ordination at all levels.
(ii) Human Resources: Human resources with necessary skills should
be deployed in appropriate positions, for effective strategy
implementation.
(iii) Technology: Technology comprises the knowledge, equipment and
work techniques necessary to deliver the products or services.
Technology is an important factor in strategy implementation. The
management should ensure that appropriate and adequate
technological inputs are available to support the performance
necessary to achieve the objectives of the strategic plans.
(iv) Decision Process: Decision processes are required for the
resolution of problems encountered in the operations of the
business and achievement of the objectives of the strategic plan.
Decisions relating to allocation of resources are particularly
important for strategy implementation because timely availability of
resources is crucial for the success of strategic plans. Sound
policies and processes should be developed to ensure that all
significant decisions are taken on a timely basis and in a
coordinated manner.

(v) Monitoring and Control Systems: Appropriate system should be

established to ensure that progress is monitored against the
established standards on a continuous basis and deviations if any,
are identified for taking timely corrective actions.
(vi) Reward System: A well-conceived reward system comprising
salaries, benefits, promotions and recognition should be developed
to provide necessary motivation to the workforce for successful
implementation of the strategic plans.
7.5 ACHIEVING GOALS

The key factors which contribute towards the achievement of only a limited
number of goals envisaged in the Strategic Plans are:
(i) Inadequate understanding of the strategic plans and failure at the business
and functional levels to realise that sustained and coordinated efforts are
required to achieve the goals.
(ii) Poor allocation of resources, organizational as well as human. Lack of
support from the management in providing adequate resources for the
achievement of the goals set in the strategic plans.
(iii) Weak organizational culture, leading to lack of involvement of the
management at the business and operational levels who feel that they are
not on board in the strategic planning exercise and therefore there is lack of
ownership of the plans and goals from their side.
(iv) Consideration of the strategic planning as a ritual exercise and not as a
day-to-day sustained effort for achievement of the objectives of the plan,
indifferent attitude and lack of commitment and motivation on the part of
the line managers towards the achievement of the goals.
(v) Poor Communication and lack of coordination between the top, middle and
operational level of management leading to poor goal definitions and
unawareness of the departments role in achieving the goal.
(vi) Pre-occupation of the operational level managers with the achievement of
their short-term targets and lack of awareness of the contribution of their
own efforts towards achievement of the overall objectives.
(vii) Inability to integrate and coordinate the various functions of research and
development, HR management, procurement, production, marketing and
finance with the result that these activities are working independently and at
cross purposes.
(viii) Absence of a proper system to measure actual performance from time-
to-time and compare the results with the targets to take timely corrective
measures in the event of any new development or unfavourable
variances.
7.6 DOWNSIZING
(a) Downsizing is the process of reducing the number of employees with the
purpose of making the organization more efficient and responsive to the
changes in its business environment. It results in more flat organizational
structures, greater delegation of authority and responsibilities, improved
communication within the bank and more functions being performed at the
lower echelons in the organization, close to the points of interaction with the
customers.

Answers
(b) HR Manager of the bank should keep the following considerations in

perspective while pursuing a policy of downsizing and laying off of
employees:
(i) The downsizing process should be transparent and objective and not
convey any impression of favouritism or create a feeling of
victimization.
(ii) The laying off of employees should not demoralise the surviving
employees or pose a threat to their job security concerns which would
affect their morale and performance.
(iii) The layoffs should not result in loss of all employees who are
performing important functions and are conversant with the internal
procedures of the bank.
(iv) The remaining staff should not be excessively overburdened as they
would have to carry the additional workload which was handled by the
employees who have been laid off.
(v) The downsizing should not lead towards excessive consolidation of
duties and responsibilities which may result in compromising the
important controls and security aspects of the banks operations.
(vi) The bank should not have negative image in the financial circles nor
should the customers have any apprehensions about the goodwill
and long-term financial standing of the bank and its ability to continue
to render good service to the customers.
(vii) Before downsizing there should be a fresh appraisal / performance
competence done and results taken in consideration
7.7 CHANGE MANAGEMENT I

Employees offer strong resistance to major organisational changes and prefer to
continue with the existing status because of the following reasons:
(i) The employees may have concerns of financial insecurity due to loss of
their jobs or decline in their existing level of compensation.
(ii) The employees fear that they may lose their present position/status, power
and authority.
(iii) The employees may anticipate that changes in work assignments,
alterations in work processes and transfers would threaten their present
work routines, patterns of social-on-the-job interactions and friendships.
(iv) The employees may fear uncertainties in the new organizational design,
attitudes and working styles of new supervisors and their own status in the
organisation in the revised set-up.
(v) The failure of management to communicate to the employees in a
convincing manner the reasons and need for change which gives rise to
suspicions and apprehensions and results in resistance to change.
(vi) The fear of dissonance because employees may have to confront with new
and different process, systems, technology or expectations. The
dissonance or discomfort created by what is new or different is a
psychological process which causes resistance to change.

7.8 CHANGE MANAGEMENT II

(a) A suitable model might be the Lewins three-step change model, supported
by Lewins force field analysis.
(i) The three-step change process is unfreeze, move (change) and re-
freeze. The unfreeze step is to develop recognition amongst the
people affected that change is needed and is desirable, and obtaining
agreement about the nature of the changes that are required. The
move step is making the change. Once a change has been made,
there is a risk that employees will go back into their former habits and
ways of doing things: re-freeze means taking measures to ensure
that the change becomes established and the new accepted way of
doing things.
(ii) Force field analysis can be used to assess the strength of resistance
to change, and the nature of the forces driving change. Lewin
recommended that the most effective approach t gaining acceptance
of change is to find ways of reducing the forces of resistance to
change.
(b) Internal marketing involves establishing the views and opinions of people
inside the organisation and trying to market an idea to them for example,
trying to persuade them of the need for change. In the context of change
management, internal marketing means finding out the views of employees
towards a proposed change and trying to promote the change as a good
thing. In external marketing, the customer is the main consideration. In
internal marketing, the employee is the customer whose views and
opinions must be taken into consideration: plans for change should be
amended where appropriate, in response to the views of employees.
7.9 CHANGE MANAGEMENT III

(a) Changes are required at Feathers Theatre if it is to survive and prosper.
However, change is almost always resisted and it will be no different at this
theatre.
The reasons for resistance will be the same experienced in other
organisations. There is always the fear of the unknown. How will the
professional actors cope with the increased pressures associated with
presenting more plays? How will audiences react to these changes?
The current situation is known and possibly understood. However the
changes proposed may not operate in the ways intended and the situation
may deteriorate. People also resist change if their vested interests are
threatened. This is applicable to nearly all the stakeholders. There may be
a switch to less satisfying and interesting plays. This will affect both the
actors/ actresses as well as the volunteers, but for opposite reasons. The
members of the town council might have some of their patronage removed
and their prestige might be reduced. This would not be in their interests.
Change is also resisted if the stakeholders misinterpret the causes and
consequences of the change. It is essential that David Manning has full
consultation with all parties and clarifies all points. If any group of
stakeholders believes it is being discriminated against, it will resist change.
It is important to stress a 'win-win' situation and not a 'win-lose' one.

Answers
Ideally timing needs to be right to introduce changes. It is not usually

desirable to have change forced on an organisation. However, it is possible
that in a crisis, people will pull together and agree to compromise.
Change is also usually resisted if there are insufficient resources to help
facilitate that change. Unfortunately Feathers Theatre does not have
sufficient resources this is the reason for the changes. Consequently, it is
likely that some difficult decisions will have to be taken involving issues
such as redundancies, possible pay reductions, higher ticket prices and a
tight control over costs. These types of change will always be resisted. It is
the strength of the resistance which is of critical importance.
Apart from economic fears, such as redundancies and pay cuts, there are a
number of social reasons for resisting change. The volunteers may feel that
their work is under-valued if their views are not taken into consideration.
Members of the town council might believe that their status has been
reduced if their opinions are not taken into account. This could have a
serious impact on the way they view the theatre's grant. Requiring the
resident acting group to change their method of working could imply a
criticism as to their past performance. More important, however, is the
breaking up of the group as a result of the proposed redundancies. There is
probably going to be resistance here. This is likely to be the most delicate
part of David Manning's negotiations. He has to demonstrate to the group
that alternative strategies could involve even greater sacrifices.
Most of the reasons for resisting change could be challenged by open
discussions. The facts must be made clear to all parties. A process of
'divide and rule' will only make the situation worse. David must state the
position as it is. He must review the alternative strategies as presented by
the stakeholders and show why and how they would not solve the problem.
He must present his ideas for improving the situation, explaining how the
changes could be implemented and what benefits and disadvantages may
occur. Finally he must show how the situation will only deteriorate if nothing
is done. Hopefully the stakeholders will appreciate the logic of his
suggestions, and realise that they may all have to compromise on some but
not all of their ambitions, and recognise that they still have an important role
to play in the theatre.
(b) Implementing change successfully in an environment such as Feathers
Theatre, where the participants all have differing ideas as to what should be
done, requires leadership of a high quality. David Manning has one
particular advantage. Being a new appointee he is not seen to be an ally of
any particular stakeholder group. He is not associated with any strategies in
the past, which have been badly implemented. He brings to the situation
fresh and unbiased ideas. However, there is also a risk that some of the
interested parties may feel that he has inadequate experience.
Mason must possess good interpersonal skills. He must be able to relate
to all the parties, but must not be seen to treat one group more favourably
than others. This may not be such an easy task because the different
stakeholder groups, although all concerned with the success of the theatre,
have different backgrounds, different objectives and will have different
personalities. He must be a good communicator so that he can explain the
changes so that each party sees the benefits for them. He must provide
good information and not be selective. Usually the information leaks out via
a 'grapevine' and this would only make the situation worse. Mason also
needs to be able to time his negotiations correctly, so that the interested

parties have an opportunity to listen to, reflect on and understand the

varying arguments. In trying to do this when a stakeholder group, such as
the actors, is concentrating on a performance, would be a big mistake. He
must take time over the change programme. A quick-fix attitude is not
advisable.
Mason must prove to be both a trustworthy and an inspirational leader.
If there is any doubt as to his commitment to the theatre, or if he is
suspected of dishonestly representing their views, then his chances of
winning the people over will be poor. It is a mistake to try to hide the truth,
even if it is unwelcome. He needs to inspire each of the parties so that they
are willing to subordinate their personal views for the benefit of the theatre
as a whole. Good change agents also need to be opportunistic. This does
not imply that they seek short-term advantages, but that when they see an
opportunity to successfully accelerate the change, then they seize it. Mason
must also have sound planning skills. Change does not just occur. If it is to
be successfully achieved then it must be planned for. Unlikely outcomes
must be considered and contingency plans and explanations must be
prepared.
Mason needs to demonstrate a competence in team-building. It is useful
to get the stakeholders to participate together in the change programme.
This involvement can increase the commitment of the groups by providing
them with a sense of 'ownership'. He must monitor the progress of the
change to ensure that it is actually happening. Some groups will find it
harder to accept the changes required than others. Mason should
recognise the need to provide support when this occurs and give
counselling if necessary. The change will progress that much more
effectively if the groups feel comfortable with the situation. If a favourable
and positive climate can be created then change will be more readily
effected.
7.10 OUTSOURCING
The advantages of Business Process Outsourcing are:
(i) Outsourcing would enable the managers and the staff to concentrate in
activities which are of critical importance for the achievement of the
corporate mission, thus improving their core competencies and the overall
productivity.
(ii) Outsourcing may help to reduce the operating costs of SEL.
(iii) Outsourcing would enable SEL to reduce the amount of capital investment
that it would otherwise have to incur in the facilities which would be
provided by the outsourced agency. Also enable SEL to improve core
activities performance.
(iv) Careful selection of outsourcing companies would help to acquire new
know-how and expertise from the outsource agencies as they would be
providing similar services to their several customers.
The disadvantages of Business Process Outsourcing are:
(i) Outsourcing involves loss of some control and places excessive reliance on
outsiders.
(ii) Outsourcing can result in loss of valuable in-house skills.
(iii) Outsourcing may result in creation of competition in future.

Answers
(iv) Outsourcing may result in disclosure of critical confidential information to

outsiders.
(v) If the level of the performance is not the same then it might result in
brand dilution and shift in brand loyalty.
7.11 CENTRALISED CASH MANAGEMENT

Multinational Corporations seek to achieve the following advantages through
policies of centralised cash management and establishment of cash pools at
prominent financial centres:
(i) Security and Convenience: Centralised cash pools are maintained at major
financial centres which offer advantages of political and economic stability,
convertibility of currencies, access to international communication facilities
and well defined legal procedures. The pooling of cash funds at such
locations provides security and convenience of prompt transfer of funds
from and to the subsidiaries.
(ii) Availability of Information: Location of cash pools at major financial centres
provide advantages of immediate access to latest information of the relative
strengths and weaknesses of various currencies, fluctuations in rates of
return on financial instruments in various currencies and ease of execution
of financial transactions.
(iii) Holding of Minimum Surplus Funds for Precautionary Purposes: The
pooling of funds at centralised locations in excess of the transaction
requirements of the subsidiaries enables the MNCs to reduce the overall
size of the cash pool without any loss of level of protection to any individual
subsidiary.
(iv) Reduction in Interest Costs: The large size of the pooled funds enables
financial managers to negotiate borrowings most effectively and thus
reduce borrowing costs.
(v) Acquisition of Services of Competent Personnel: The funds can be
managed by highly competent financial managers whereas individual
subsidiaries may not be in a position to acquire the services of such
executives.

CHAPTER 8 FINANCE, R&D AND MARKETING STRATEGIES

8.1 SPONSORED EVENTS
Companies which pursue market-driven business strategies consider
sponsorship of attractive and high profile events to achieve the following
objectives:
(a) Increased Visibility
The wide exposure such events receive in both the electronic and print
media provides sponsors with vast publicity opportunities.
(b) Business-to-business Promotion:
Competition for prominent positioning of products in the shelf-spaces of
popular retail outlets is a big challenge for companies. Various types of
sponsorships e.g. paid overseas holidays or complimentary tickets/passes
for popular events can be used to attract retailers, dealers and other
intermediaries in the distribution channel to promote the companys
products.
(c) Differentiate Product from Competitors
Sponsorship provides companies a competitive selling advantage because
it offers opportunities for category exclusiveness which can be used as
product differentiation strategy for creating greater acceptability amongst
the customers. Sponsorships help companies to create exclusive attributes
for their products in the minds of the customers to fulfil their needs and
objectives.
(d) Active Display of Product Attributes
Sponsorship allows companies to draw special attention of the audience to
the advantages and unique attributes of their product by promoting special
events e.g. tyre manufacturers may sponsor car-racing events to
demonstrate their products in action.
(e) Cost Effectiveness
Sponsorships are usually more cost effective especially when a specific
category of audience is to be targeted.
(f) Targeted Sponsorship
Properly planned sponsorship programs integrated with predetermined
objectives and focused on specific audience targets can create lasting
impact.
(g) Captive Viewership
Advertisements on TV are often avoided by the viewers, for example by
changing the channels. In case of popular programs/shows, it is possible to
retain the attention of the captive viewership.
8.2 GLOBALISATION
The significant objectives of multinational companies in pursuing strategies of
globalization are:
(i) To achieve significant economies of scale in management and other
functional operations of the global companies.
(ii) To recover extremely high Research and Development expenditures
required in the manufacturing of knowledge-based products from widely
dispersed target markets located in different countries.

Answers
(iii) To gain access to wide global markets without incurring substantial

expenditures on product development in different markets.
(iv) To seize the advantages offered by growing economies, such as
dismantling of trade restrictions, growth of free trade zones and relaxation
of regulations regarding direct foreign investments.
(v) To enter into widely diversified markets and achieve maximum profits
through transfer pricing and tax concessions.
(vi) To derive maximum advantages of access to cheap sources of labour, raw
materials and energy.
8.3 PACKAGING
The packaging features which would influence a consumers decision to purchase
an edible consumer product are:
(i) Convenience of the Size of the Package The consumer should be able
to choose from a range of sizes available, that is, a sachet for a single use,
or a size which would meet the requirements for a period of say, one month
or an economy package for a large family.
(ii) Preserve the Quality of the ProductThe packaging should be
capable of preserving the quality of the edible product from the elements
e.g. sunlight, humidity or moisture.
(iii) Product InformationThe packaging should provide vital information
regarding the ingredients of the food item, their nutritional value and expiry
date
(iv) Attractiveness of the PackageThe packaging should be attractive in
its presentation and colour scheme to draw the attention and interest of
the customer at the point of display of the product on the shelves in the
retail outlets. The design and colour should be in line with the brand and
brand name should be displayed prominently
(v) Convenience of Handling the Package The packaging should make it
easy to take out the edible product for use and also close the package
easily after use.
(vi) Convenience of StorageThe package containing the edible product can
be stored conveniently and occupy minimum storage space.
(vii) Disposal of the PackageThe package, after consumption of the
contents, can be disposed of safely from the environmental viewpoint
8.4 BRAND EQUITY AND PULL STRATEGY

(a) Brand Equity is the differential effect of awareness and familiarity of the
brand name on the customer response to the quality of a product or
service. It is a measure of the brands ability to capture and retain the
preference and loyalty of the consumers. A brand has positive brand equity
when consumers react more favourably to it than to any generic or other
branded versions of the same product.
(b) (i) A Pull Strategy is a promotional strategy in which considerable
expenses are incurred in advertising and customer promotion to
attract the final consumers who seek to purchase the products on the
strength of its brand name.

(ii) SPL intends to launch an aggressive Pull Strategy to achieve the

following advantages:
Further strengthen the brand image for its products and create
greater brand awareness among the quality conscious
customers.
Differentiate its products from those of the competitors and
create value for the customers who would be willing to pay a
premium price for the products.
Create customer loyalty by emphasizing that the long-term
advantages of superior quality paints far outweigh the apparent
savings offered by competitors by way of lower prices.
8.5 PENETRATION AND SEGMENTATION

(a) Market Penetration Policy aims to charge low prices of the product to
capture a large share of the market or achieve large volume of sales.
Market Penetration Policy may be pursued to achieve optimal results under
the following conditions:
(i) Discourage existing and potential competition in a highly competitive
market.
(ii) Sufficient production capacity exists and the firm is prepared to
sacrifice short- term profits to capture a major share of the market.
(iii) Market is price sensitive and a low price would result in rapid growth
of the market.
(iv) Manufacturing and distribution costs would show a downward trend
with increase in production and the size of the market.
(b) Marketing Segmentation is a process of dividing the total market into
several distinct groups with each group having certain homogeneous
characteristics. The groups can be formed on the basis of their geographic
locations, income levels, age groups, educational qualifications,
psychological behaviour, buying habits and cultural backgrounds, etc.
The markets can be divided into segments if the segment fulfils the
following criterion:
(i) The market segment must be capable of classification as a distinctly
identifiable and measurable group having common characteristics.
(ii) The market segment must be of a size which is sufficiently large to
elicit interest of the seller in term of its sales revenue and profit
potential.
8.6 SKIMMING AND PENETRATION STRATEGIES

(a) Foresight Electronics would be able to adopt its Market Skimming Strategy
successfully in the following conditions:
(i) when the niche market for its products comprises of customers who
can afford and are willing to buy the product at the high prices.
(ii) when the firm is in a position to obtain the advantage of initial high
price of its products for the duration that it intends to pursue its
market skimming pricing strategy.

Answers
(iii) when the high price would create and convey an image of superior
quality products among the buyers.
(iv) when the unit cost of manufacturing a small quantity of output is not
so high so as to offset the advantage of selling the product at the high
price.
(v) there should be a high entry barrier of the industry.
(b) It would be advantageous for Household Furniture Company to pursue a
Market Penetration Strategy in the following situations:
(i) when the demand for household furniture is price elastic.
(ii) when the firm is in a position to achieve significant economies of
scale by producing and selling a large volume of output.
(iii) when the quality of the furniture sold by Household Furniture
Company and its promotional strategies are designed to capture a
large share of the expanding market.
(iv) when there is intense competition in the market and Household
Furniture Company wants to retain/expand its share of the market to
derive benefits in future.
8.7 MARKETING MIX

Identification of appropriate characteristics of each category of the Marketing
Mix for the different categories of Consumer Products is as follows:
Convenience Shopping Specialty
Products Products Products
(i) Price Low price High price Expensive
(ii) Consumer Frequent Less frequent Special purchase
Buying purchase/less purchase/keen effort/brand
Behaviour planning comparison of loyalty
price, quality and
style
(iii) Distribution Widespread Distribution in few Outlets in
Channels distribution at outlets specialised
convenient markets/shopping
locations malls
(iv) Promotion / Mass promotion Advertising and Carefully targeted
Advertising by producer personal selling promotion by
by producer/resellers
producer/resellers
8.8 GLOBAL CAPABILITIES

The core capabilities which are commonly observed in leading global business
organizations are:
(i) In-depth knowledge of the organisations products/services, their strengths
and special customer service skills.
(ii) Highly developed marketing skills by way of insight of consumer behaviour,
market segments, share of the market and distributions channels.

(iii) Capacity for continuous innovation and research which is a prerequisite for
maintaining and consolidating of their global leadership status in a highly
competitive business environment.
(iv) Creation and retention of a pool of talented and motivated management
team and work force aligned with the strategic objectives of the
organisation.
(v) Financial resourcefulness with the capability to utilise the funds effectively
with sound planning and control structures.
(vi) Assessment of the strengths and weaknesses of the competitors in the
different territories in terms of their market share, competitive advantages
and anticipated business strategies.
8.9 CHANNELS OF DISTRIBUTION

(a)
Selling through the supermarket group
Advantages Disadvantages
Access to a large number of Possibly large sales volumes: this
potential customers could act as a drain on cash in the
early stages of the business.
Potential for large sales volumes
Single customer: risk of losing the
The supermarket will probably sell
customer if sales are disappointing
the hats as a fairly narrow product
or there are problems with supply.
range of; therefore less design
requirements Gabriel cannot use his own brand for
the products.
Probably easily-managed distribution
arrangements There may be pressure from the
supermarket group to reduce prices.
Sales prices for Gabriel will be lower
than the prices charged by the
supermarkets.
Selling through independent fashion shops
Shops specialise in selling fashion Possibly low sales volumes
goods.
Shops will probably want a wide
Access to customers looking to buy range of differentiated products.
fashion goods.
Need for high quality
Gabriel can use his own brand for
Possibly higher costs of distribution
the products.
(to the shops)
Shops will probably want to sell
Using some of the shops might be
products at high prices, therefore
unprofitable.
potential for high gross profit
margins Sales prices for Gabriel will be much
lower than the retail prices charged
by the shops.

Answers
Selling through website and Internet
Products can be made to order. Problem of attracting potential
customers to the website.
Product quality may not be such an
important issue. Distribution will be more expensive
and time-consuming: products must
Gabriel can use his own brand for
be delivered to customer addresses
the products.
Order-handling will be more complex
Ability to be flexible with design: new
due to the larger volume of small
designs can be varied to meet
orders to handle.
customer preferences.
Direct contact with users of the
product
Higher prices and gross profit
margins
(b)
Supermarkets Fashion shops Internet
Product Small product Wide product Wide product

range range range
Large volumes Small volumes Volume difficult to
predict
Quality important Quality important
Quality probably
less important
Place Supermarkets Specialist shops Internet, website,
e-commerce
Price Pricing probably Prices to the Prices probably
critical: low prices customer will be neither high nor
high low.
Promotion Through the Need for brand Need for brand
supermarkets own development development.
brand
Success of website
in attracting hits
will be critically
important
8.10 RESEARCH AND DEVELOPMENT STRATEGY

Some companies must invest in R&D to survive and grow. The main financial
problems associated with R&D are likely to be as follows:
Deciding how much in total to invest in R&D each year.
Dividing the total spending between pure research, applied research and
development.
Recognising the probability of failure of many research projects and some
development projects. Returns are therefore extremely difficult to predict.

Even so, recognising the need to innovate. There is a risk that the
accounting mentality will persuade companies to invest more in products
they have already developed, and avoid R&D.
Companies that do not spend enough on R&D will fail to innovate. They
must therefore copy new products that rival companies develop and bring
to market. However, these new products may be protected by patents.
There has to be a system for planning, monitoring and controlling spending
on R&D.
8.11 MARKET RESEARCH

(a) Market Research is the systematic designing, collection, analysis and
reporting of data relevant to distribution and selling of goods and services in
a specific marketing environment facing an organization.
(b) The basic reasons for undertaking market research are as follows:
(i) to identify market opportunities and problems and determine the need
for changes in marketing plans;
(ii) to evaluate and predict consumers behaviour which may influence
their decisions for purchase of various goods and services;
(iii) to analyse the marketing strategies of competitors and their impact on
the firms business;
(iv) to formulate product development, pricing, promotion and distribution
strategies to achieve optimal results.
8.12 GLOBAL VS. DOMESTIC BUSINESS STRATEGY

A global business strategy specifies a standardised worldwide product and
marketing strategy by which a firm sells the same product in essentially the same
manner throughout the world by highlighting its main features such as quality,
specifications, warranty, packaging, etc.
A multi-domestic or adaptive business strategy is one in which the firm treats
each market in a different manner and develops products and marketing
strategies which appeal to the varying customs, tastes and buying habits in the
different national markets.
Real Life Example of a Global Business Strategy - photocopiers, medical
equipment, chemicals, cement, steel, etc. are not sensitive to differences in
cultures and are sold in different markets highlighting similar features and
attributes such as quality and convenience, etc.
Real Life Example of Multi-domestic or Adaptive Products strategy - Food
products such as fast foods, apparel and clothing, cosmetics, etc. which are
adapted to meet the consumption habits, tastes and cultural sensitivities and
unique requirements of the different markets.
8.13 LIFECYCLE MARKETING

(a) Product
Place
Price
Promotion

Answers
(b)
Stage of life Marketing mix (suggested)

cycle
Introduction Build product awareness

If possible, obtain protection for intellectual property
rights (patents, copyrights, etc.)
Establish the brand and the quality to be associated
with the brand
Develop the market and distribution channels
Pricing: possibly choose a market penetration pricing
strategy, or a price skimming (high price) market
strategy
Promotions should be aimed at innovators and early
adopters in the customer population: develop
product awareness
Growth Build the brand

Maintain product quality, but add additional features
to create product differentiation
Add distribution channels
Keep prices unchanged: sales growth is rising
therefore there is no need yet to change pricing
strategy
Promotion should aim now at a broader audience of
potential customers
Maturity Continue to enhance the product, adding features to

strengthen product differentiation
Focus on competition in distribution channels, to
maintain a share of the routes to market
Reduce prices due to growing competition
Promotion: emphasise product differentiation
Aim to maintain market share and maximise profits
in the face of more intense competition
Decline There are several options, and a different marketing

mix would be developed to go with each. The
strategic options are: maintain the product and try to
prolong its life, harvest the product to obtain as
much cash as possible in the short term, or disinvest
immediately

8.14 PROCESS OF GLOBALISATION

Globalization has assumed great importance in the present business
environment due to the following reasons:
(i) Adoption of free market economic policies by an increasing number of
countries has created opportunities for capital investment and significant
economic growth.
(ii) Rapid improvements in communications have reduced costs of
transportation and facilitated quick movement of goods, services and
financial resources.
(iii) Technological advances have made it possible to manage and control
business operations in different countries through electronic mail, internet
and frequent travel by key management and other professional staff.
(iv) The development of the emerging markets has expanded the demand for
products and services worldwide.
(v) Global companies seek competitive advantages by locating production
facilities of components and parts in those countries where the costs are the
lowest.
8.15 OVERSEAS MANUFACTURING

The advantages and disadvantages of undertaking overseas manufacturing
operations through a wholly-owned subsidiary company are:
Advantages
(i) The Korean company would not have to share its profits with any other
entity.
(ii) The Korean company would not have to share its technology and know-
how with any foreign entity.
(iii) The Korean company would not have communication problems which are
frequently experienced in joint venture operations.
(iv) The overseas manufacturing operations of the Korean company would be
fully integrated and aligned with its overall international operations.
Disadvantages
(i) The substantial amount of investment may prevent or discourage the
Korean company from undertaking wholly-owned overseas manufacturing
operations.
(ii) The risks of nationalization and losses are much greater in the event the
host government introduces major changes in its policies towards foreign
investments.
(iii) It may be difficult to recruit suitable high-level technical and management
personnel in the host country in the absence of benefits of equity
ownership.
(iv) The wholly-owned subsidiary may not be able to avail the benefits of the
overseas partners valuable knowledge and expertise of the domestic
conditions, local markets and distribution channels etc.

Answers
8.16 MARKETING INTELLIGENCE

(i) Marketing Intelligence System is an ongoing and organised procedure to
generate, organise, store, disseminate, analyse and retrieve large amount
of data from internal as well as external sources for use in making
marketing decisions.
(ii) The different sources would facilitate in the creation of an effective
Marketing Intelligence System are:
a. Well trained and motivated sales force to provide inputs on the
improvements required in the companys current marketing mix as
well as identify new market opportunities.
b. Motivated distributors, retailers and other intermediaries who would
obtain important information and pass it on to the company to
improve the overall quality of products and consumer services.
c. Obtain feedback from customers regularly to improve the quality of
the products and services in order to offer more value to the
customers.
d. Participation in trade shows and examination of competitors products
and their advertisements etc.
e. Collect information from competitors published reports, suppliers,
couriers and transporters.
f. Published government statistics relating to population, agricultural
production, manufacturing data, etc. to extract information which can
be incorporated usefully in the Marketing Intelligence System.
g. Purchase of information from professional suppliers of data and
information. These external firms have access to useful data and sell
them to the interested parties.

CHAPTER 9 OPERATIONS STRATEGY

9.1 COST ECONOMIES
The economies in production and operating costs can be achieved by focusing in
the following areas:
(i) exploring alternate sources of cheaper raw materials and components.
(ii) negotiating with existing suppliers of raw materials and components for
more favourable terms.
(iii) relocating facilities to areas which have lower costs.
(iv) improving capacity utilization to achieve economies in costs.
(v) introducing modifications in production designs to reduce costs.
(vi) improving machine and worker efficiencies.
(vii) re-engineering processes to eliminate activities and bring cost reductions.
(viii) hiring contract workers with the objective to reduce labour costs.
(ix) outsourcing processes/ manufacturing of components to low cost suppliers
if quality control measures can be implemented.
(x) adopting efficient inventory management practices such as just-in-time
inventory management techniques.
9.2 FORWARD INTEGRATION

RBCL should consider the following factors while evaluating the decision to
establish its own network of retail outlets:
(i) Examine the existing network of retailers of RBCL to ascertain the
extent to which they have advantages of location of their shops in
important shopping centres.
(ii) Compare the capital expenditure involved in the establishment of retail
stores and their recurring operating expenses and inventory carrying costs
with the costs incurred under the existing set-up.
(iii) Estimate the envisaged number of RBCLs own retail stores to be
established to cater to the requirements of the target segment of the
market.
(iv) Determine the ability of RBCL to mobilise sufficient financial resources
required to establish and operate the business of retail marketing of its
products
(v) Examine whether sufficiently experienced and trained staff at various levels
would be available to manage and operate the retail outlets.
(vi) Ascertain the profit margins currently earned by the independent
retailers on the Companys products and the impact of the self-owned
retail outlets on the companys profitability.
(vii) Consider the impact of the decision to establish own retail outlets on
the Companys future relationships with the independent retailers.
(viii) Examine the need to revise the terms and conditions relating to sales to be
offered to the independent retail outlets.

Answers
(ix) Enquire into the business policies of competitors who have their own retail
network and whether RBCL would be able to enjoy a competitive
advantage over the independent retailers.
(x) Examine the extent to which the availability of more reliable information
of future market and fashions trends would be an advantage after RBCL
establishes its own retail outlets.
(xi) Analysis of the industry growth expected and the market share to be
captured, carry out a viability study of the share of market available
(xii) Analyse the value addition by gaining ownership of retail outlets; evaluate
the possibility of brand dilution in independent retail houses.
9.3 ALPHA EQUIPMENTS

The advantages of appointment of a Single Distributer in Pakistan by Alpha
Equipments are:
(i) The large volume of business would attract a competent and resourceful
distributor who would wield considerable influence in the local business
community in Pakistan.
(ii) The appointment of a knowledgeable Single Distributor who is conversant
with the local business practices, culture and marketing channels would
ensure smooth handling of all marketing operations in a more professional
and purposeful manner.
(iii) The Single Distributor would be able to coordinate promotional efforts and
exchange vital information with Alpha Equipments on a continuous basis
and in a purposeful manner.
(iv) Training and marketing efforts of the retailers located in the various cities in
Pakistan would be coordinated in a much more effective manner.
(v) The Single Distributor would be able to maintain sufficient level of
inventories as he would have a better perception of the market demand and
as a result make prompt dispatches of supplies to the retailers as and when
required.
(vi) The Single Distributor would have high stakes in the business which would
lead to greater effort and a better principal distributor relationship.
(vii) The logistics of exports including transportation costs would be less
cumbersome and more economical.
9.4 NKL ELECTONIC SERVICES

(a) A simple value chain of the primary activities of NKL is shown below.
Handling Re-branding Customer Local On-site
and storing of collection advertising technical
inbound fully products Technician Web based support
configured Re- delivery and enquiries Back to
equipment packaging of installation base
Quality products support
inspection
Inbound Outbound Marketing
logistics Operations Logistics and sales Service

Comments about value might include:

Inbound logistics: Excellent quality assurance is required in inbound
logistics. This is essential for pre-configured equipment where customers
have high expectations of reliability. As well as contributing to customer
satisfaction, high quality also reduces service costs.
Operations: This is a relatively small component in the NKL value chain and
actually adds little value to the customer. It is also being undertaken in a
relatively high cost country. NKL might wish to re-visit the current
arrangement.
Outbound logistics: Customer feedback shows that this is greatly valued.
Products can be picked up from stock and delivery and installation is
provided if required. Most of the companys larger competitors cannot offer
this service. However, it is unlikely that this value can be retained when
NKL begins to increasingly supply outside the geographical region it is in.
Marketing and sales: This is very low-key at NKL and will have to be
developed if the company is to deliver the proposed growth. The limited
functionality of the website offers little value to customers.
Service: Customer feedback shows that this is greatly valued. Most of the
companys competitors cannot offer this level of service. They offer support
from off-shore call centres and a returns policy that is both time consuming
to undertake and slow in rectification. However, it is unlikely that this value
can be retained when NKL begins to increasingly supply outside the
geographical region it is in.
(b) NKL has already gained efficiencies by procuring products through the
suppliers web-site. However, the website has restricted functionality. When
NKL places the order it is not informed of the expected delivery date until it
receives the confirmation email from ESAS. It is also unable to track the
status of their order and so it is only when it receives a despatch email from
ESAS that it knows that it is on its way. Because NKL is not the owner of
the shipment, it is unable to track the delivery and so the physical arrival of
the goods cannot be easily predicted. On occasions where shipments have
appeared to have been lost, NKL has had to ask ESAS to track the
shipment and report on its status. This has not been very satisfactory and
the problem has been exacerbated by having two shippers involved. ESAS
has not been able to reliably track the transhipment of goods from their
shipper to EIF, the logistics company used to distribute their products in the
country. Some shipments have been lost and it is time-consuming to track
and follow-up shipments which are causing concern. Finally, because NKL
has no long term contract with ESAS, it has to pay when it places the order
through a credit card transaction on the ESAS website.
NKL has stated that it wishes to continue importing fully configured
products. It is not interested in importing components and assembling
them. It also does not wish to build or invest in assembly plants in other
countries. However, it may wish to consider the following changes to its
upstream supply chain:
Seek to identify a wider range of suppliers and so trade through other
sell-side websites. Clearly there are costs associated with this.
Suppliers have to be identified and evaluated and financial and
trading arrangements have to be established. However, it removes
the risk of single-sourcing and other suppliers may have better
systems in place to support order and delivery tracking.

Answers
Seek to identify suppliers who are willing and able to re-brand and
package their products with NKL material at the production plant. This
should reduce NKL costs as this is currently undertaken in a country
where wage rates are high.
Re-consider the decision not to negotiate long-term contracts with
suppliers (including ESAS) and so explore the possibility of more
favourable payment terms. NKL has avoided long-term contracts up
to now. It may also not be possible to enter into such contracts if NKL
begins to trade with a number of suppliers.
Seek to identify suppliers (including ESAS) who are able to provide
information about delivery dates prior to purchase and who are able
to provide internet-based order tracking systems to their customers.
This should allow much better planning.
Consider replacing the two supplier shippers with a contracted
logistics company which will collect the goods from the supplier and
transport the goods directly to NKL. This should reduce physical
transhipment problems and allow seamless monitoring of the
progress of the order from despatch to arrival. It will also allow NKL to
plan for the arrival of goods and to schedule its re-packaging.
NKL might also wish to consider two other procurement models; buy-side
and the independent marketplace.
In the buy-side model NKL would use its website to invite potential
suppliers to bid for contract requirements posted on the site. This places
the onus on suppliers to spend time completing details and making
commitments. It should also attract a much wider range of suppliers than
would have been possible through NKL searching sell-side sites for
potential suppliers. Unfortunately, it is unlikely that NKL is large enough to
host such a model. However, it may wish to prototype it to see if it is viable
and whether it uncovers potential suppliers who have not been found in
sell-side websites searches.
In the independent marketplace model, NKL places its requirements on an
intermediary website. These are essentially B2B electronic marketplaces
which allow, on the one hand, potential customers to search products being
offered by suppliers and, on the other hand, customers to place their
requirements and be contacted by potential suppliers. Such marketplaces
promise greater supplier choice with reduced costs. They also provide an
opportunity for aggregation where smaller organisations (such as NKL) can
get together with companies that have the same requirement to place
larger orders to gain cheaper prices and better purchasing terms. It is also
likely that such marketplaces will increasingly offer algorithms that
automatically match customers and suppliers, so reducing the search costs
associated with the sell-side model. The independent marketplace model
may be a useful approach for NKL. Many of the suppliers participating in
these marketplaces are electronics companies.
(c) NKLs downstream supply chain is also very simple at the moment. It has a
web-site that shows information about NKL products. Customers can make
enquiries about the specification and availability of these products through
an e-mail facility.
Conventional marketing is undertaken through local advertising and buyers
either collect their products or they are delivered and installed by a
specialist group of technicians. NKL could tune its downstream supply

chain by using many of the approaches mentioned in the previous section.

For example:
Developing the website so that it not only shows products but also
product availability. Customers would be able to place orders and pay
for them securely over the website. The site could be integrated with
a logistics system so that orders and deliveries can be tracked by the
customer. NKL must recognise that most of its competitors already
have such systems. However, NKL will have to put a similar system in
place to be able to support its growth plans.
Participating in independent marketplace websites as a supplier. NKL
may also be able to exploit aggregation by combining with other
suppliers in consortia to bid for large contracts.
NKL may also consider participating in B2C marketplaces such as e-
bay. Many organisations use this as their route to market for
commodity products.
NKL may also wish to consider replacing its sales from stock approach with
sales from order. In the current approach, NKL purchases products in
advance and re-packages and stores these products before selling them to
customers. This leads to very quick order fulfilment but high storage and
financing costs. These costs will become greater if the planned growth
occurs. NKL may wish to consider offering products on its website at a
discount but with specified delivery terms. This would allow the company to
supply to order rather than supply from stock.

Answers
CHAPTER 10 IT STRATEGY
10.1 SYSTEMS
(a) Decision support system
A decision support system (DSS) is used by managers to help them to make
decisions of a more complex or unstructured nature. A DSS will include a
range of decision models, such as forecasting models, statistical analysis
models and linear programming models. A DSS therefore includes facilities
to help managers to prepare their own forecasts and to make decisions on
the basis of their forecast estimates. Models can also be used for scenario
testing.
An example might be found in a manufacturing company which uses DSS to
assist in setting the right pricing strategy when entering a new market.
(b) Expert system
An expert system is a system that is able to provide information, advice and
recommendations on matters related to a specific area of expertise. For
example, there are expert systems for medical analysis, the law and
taxation used mainly by doctors, solicitors and accountants.
A doctor may, for example, enter the various symptoms of a patient into the
expert system which is then able to conclude that a patient has contracted a
particular tropical disease.
(c) Executive information system
An executive information system (EIS) is an information system for senior
executives. It gives an executive access to key data at any time, from
sources both inside and outside the organisation. An executive can use an
EIS to obtain summary information about a range of issues, and also to drill
down into greater detail if this is required. The purpose of an EIS is to
improve senior managements decision-making by providing continual
access to up-to-date information.
For example, the executive board of a multinational retailer with 200 outlets
across 36 countries may use EIS to keep track of the performance of the
outlets with access to information about profitability and market share. The
executives could then drill-down for more detailed information for specific
branches.
(d) e-commerce
E-commerce can be defined as all electronically mediated information
exchanges between an organisation and its external stakeholders. E-
commerce is described as sell-side if it is between an organisation and its
customers and is buy-side if it is between an organisation and its suppliers.
For example, with an online retailer, e-commerce describes the exchanges
between the retailer and customers including sales, marketing, order taking,
delivery and customer service as well as the exchanges between the retailer
and suppliers such as purchasing of raw materials and supplies of office
equipment.
(e) e-business
E-business includes all aspects of e-commerce as well as work flows and
movements of information within an entity.
For example, e-business includes the interactions between departments and
functions such as the operations, sales, finance and HR departments in a
bank.

Internal processes are driven by e-business methods as well as external

relationships with customers, suppliers and other external stakeholders.
10.2 IT, PORTER AND GLOBALISATION

(a) Competitive rivalry with existing competitors. The internet encourages
greater competition. Companies provide a large amount of information about
themselves and their products on their websites. This makes it easier for
competitors to copy what they are doing. As a result of the stronger
competition, selling prices are depressed.
Threat of new entrants. In many industries, the barriers to entry have been
lowered. By using the internet, new competitors can enter the market more
quickly and more cheaply. Companies are able to enter the market using the
internet to market their products or services. They do not need to employ an
expensive full-time sales force, or distribute their products through
(expensive) traditional retail networks.
Bargaining power of suppliers. Suppliers are able to use the internet to
increase the number of clients or customers for their products. As a result,
the bargaining power of suppliers is likely to increase.
Bargaining power of customers. The internet has increased the
bargaining power of customers substantially. Customers are able to obtain
information about the rival products of many different competitors, by using
search engines such as Google and visiting many different websites. The
reality is that customers using the internet are finding it easier to switch
suppliers, and the openness of the internet and its standards makes it
difficult for a customer to maintain its customer network intact.
Threat of substitute products. The internet has also increased the threat
posed by substitute products whereby the same underlying products can be
delivered through an alternative distribution medium. For example, online
newspapers have reduced the demand for hard-copy daily newspapers.
Internet banking has led to the closure of a number of high-street branches
as banks seek to minimise their overheads whilst reaching their customers
virtually rather than physically.
(b) The internet and e-mail in particular have made it much easier for suppliers
to make contact with customers in geographically-distant countries.
The internet and e-mail have also made it easier for customers to search for
suppliers in other countries of the world. For example, when a customer
performs a product search on Amazon they are in fact making a global
search across Amazons global supply chain.
Suppliers and customers can communicate with each other much more
quickly and easily, in spite of differences in time zones.
Customers can search the internet to find suppliers who are able to provide
what they want at a competitive price. They can compare rival products or
services, and can compare prices. For example, product prices might be
lower in the USA or China than in Europe for a particular product.
Suppliers can try to attract more customers from wider geographical
markets by advertising their goods or services on their website (or other
information websites and search engines). The growth in advertising across
social media platforms such as YouTube and Facebook enables suppliers to
reach those global markets reasonably easily.

Answers
10.3 CUSTOMER-ORIENTED WEBSITE

Key features:
The website must be available all the time to users. Downtime must be
kept to an absolute minimum.
The system must integrate with the companys other transaction processing
systems, such as its customer database, accounting system and inventory
control system.
The system must be able to reassure users that it is secure. The website
should be designed with security in mind, and also with providing
reassurance to users that it is a secure site.
The website must be easy to use. The user must be able to navigate
through the site easily. Icons must be clear. Users should be able to select
goods for purchasing without any difficulty or possible confusion. Any forms
must be easy to fill in.
Screens should also be visually attractive, to encourage users to browse
through the site.
Design features such as the ability to enlarge images of products, or obtain
additional information about a product, may also be very useful.
The system must allow users to interact with it, so that the users can
choose their own route through the website easily.
The website must be kept up to date. For example, the availability of
different lines of furniture must be kept up to date, so that buyers know
whether a product is available for purchase or not. If a website is not kept
up to date, users will lose confidence in it.
The website is an advertising medium as well as an electronic store. It can
be designed in such a way that the users attention is drawn to additional
products that he or she might be interested in buying.
10.4 E-MARKETING MIX

6is of the e-marketing mix.
Interactivity
Traditional advertising media are push media, in the sense that the flow of
information is all one way, from the advertiser to the customers, and the advertiser
is trying to persuade the customers to buy its products.
A website is a pull medium, because the aim is to attract interest from customers
and make them want to visit the site.
The internet can also be used to establish interactivity with customers, and create
a dialogue. Interactivity is a very powerful marketing device. Interactivity takes
several forms, such as:
getting visitors to the site to provide details about themselves (and agree to
receive e-mails from the website owner in the future), perhaps in exchange
for additional information or a free service
getting visitors to buy a product or service and pay for it using the internet.
Having obtained the e-mail address of an individual, opportunities exist for
the continuation of the dialogue in the future, through e-mail marketing
messages and information updates. This connection with the customer
helps to establish a long-term relationship, which companies can try to
benefit from.

Intelligence
The internet can be used as a relatively low-cost method of collecting market
research data and data about customers and other visitors to a website. This data
can be analysed to produce marketing information about what customers buy, and
what information on a website interests them most.
Clickstream analysis of data on a website log file can be used to build up a
picture of customer preferences, and possibly also to identify different market
segments.
Individualisation
In traditional media the same message tends to be broadcast to everyone.
Communication via the internet can sometimes be tailored or personalised to the
individual. For example, the activities of every customer who visits a site can be
recorded and whenever a customer next visits the site, relevant information will be
retrieved from the data files and used to produce an individualised message. (In
contrast, advertising messages in media such as television are one-to-many
messages, and the same marketing message is sent to every potential customer.)
Integration
The internet provides scope for integrated marketing communications: how can
the internet complement other marketing channels to deliver customer service?
Many companies are now considering how they integrate e-mail response and
website call-back into their existing call-centre or customer service operation. This
may require a substantial investment in training and new software.
One example of integration is when the internet is used to support customer
service, for example, by encouraging users to check a list of frequently asked
questions (FAQ) compiled from previous customer enquiries before contacting
customer support via phone.
Industry restructuring
The internet can lead to a re-structuring of the industry supply chain.
Disintermediation is the removal of intermediaries such as distributors or agents:
this occurs for example when a company starts selling directly to end-consumers
through its website, and reduces or abandons its use of sales agents, distributors
and sales representatives. Examples include online banks and online
newspapers.
In other markets there has been re-intermediation, where new intermediary
companies sell the products of other suppliers, when the suppliers had previously
sold direct to customers. An example is the use of intermediaries such as
lastminute.com to sell holidays, travel arrangements, book hotel accommodation
and buy theatre tickets and tickets to other entertainment events.
Independence of location
The internet introduces the possibility of increasing the impact of an entity on a
global market. Users of a website cannot easily tell from the website whether it is
owned by a small local company or a large multinational or global company. This
gives small companies opportunities to sell into global markets.
For example, the internet also makes it possible to sell to a country without a local
sales force. In the UK, the internet is used extensively to advertise residential
property in other European countries, for purchase or rental.

Answers
10.5 CUSTOMER RELATIONSHIP MANAGEMENT

(a) CRM
The purpose of customer relationship management (CRM) is to help
companies to better understand the behaviour of their customers and
subsequently modify their marketing operations to service customers in the
best way possible. This will include:
Finding out more about the purchasing habits and preferences of
customers
Profiling the characteristics and needs of individuals customers and
groups of customers more effectively
Changing the way the company operates, in order to improve its
service to customers and the marketing of its products.
(b) Security
Deliberate corruption. All computer systems are exposed to risk
from viruses. Hackers may also gain entry to a system and
deliberately alter or delete software or data.
The loss of key personnel with specialist knowledge about a
system. For example, the risk that a senior systems analyst will leave
his job in the middle of developing a complex new system.
The exposure of system data to unauthorised users. For example
hackers and industrial espionage.
The software might have been written with mistakes in it, so that it
fails to process all the data properly.
Human error. Individuals make mistakes. They may key incorrect
data into a system. In some cases, they may wipe out records, or
even an entire file, by mistake. Human error is also a common cause
of lapses in system security leaving computer terminals unattended
is just one example.
Technical error. Technical errors in the computer hardware, the
software or the communications links can result in the loss or
corruption of data.
Natural disasters. Some computer systems may be exposed to risks
of natural disasters, such as damage from hurricanes, floods or
earthquakes.
Sabotage/criminal damage. Systems are also exposed to risk from
criminal damage, or simply theft. Risks from terrorist attack are well
publicised. Losses from theft and malicious damage are much more
common.
The software should contain controls as a check against errors in
processing, such as human errors with the input of data from
keyboard and mouse. The software might not contain enough in-built
controls against the risk of input error and other processing errors.

10.6 INTRANET
(a) Intranet characteristics
An intranet is a collection of data collated with the use of internet
technology, allowing a number of pages to be linked together and
published. Features include hyperlinks, icons and search engines accessed
with the use of a browser.
The data is only available to the staff working within DGB, creating a facility
which enables the staff to access and share common information relating to
the provision of DGB products.
Benefits
Corporate image The access to the pages on the intranet may be noted
with a logo, symbol or consistent colour, etc., this will help staff to identify
with the intranet and the information that it provides, and therefore create a
common understanding.
Links There is the opportunity to link items on the pages together, which
improves the ability to move between information which relates to each
other, therefore facilitating ease and speed of access to data.
Search facility As the data can be linked, the intranet has the power to
enable staff to search for items with a common theme, therefore reducing
the time to retrieve information.
(b) The impact of the use of an intranet on the operations of the business
includes the following.
Inventory management all data relating to inventory maintained by the
company can be stored on web pages, facilitating search functions. This
will help the company to quickly replenish inventory between branches
without having to contact a supplier. This will reduce the costs of ordering
from a supplier when the inventory is already available within one of the
branches. There is also the opportunity to link this internal inventory system
to that of their suppliers, therefore giving the opportunity to have automatic
ordering from the supplier at the lowest cost (extranet).
Price control the collation of the prices relating to the upper and lower
limits can be maintained more easily with the input from dealers. When the
headquarters carry out the quarterly review, it can be achieved more
quickly as all the prices are stored centrally. The ability to access the
information more quickly helps to ensure that the limits are accurate, to
enhance competitiveness.
Costs the intranet becomes the source of information for all the
users/staff, this will help to reduce the printing of catalogues and
distribution of information to customers and dealers. The identification of
possible duplication of information may also be easier to evaluate,
eliminating time spent on tasks such as searching. All current internal
information can be easily maintained and distributed.
Compatibility the company will need to evaluate the compatibility of the
existing system within the organisation to maximise the potential of
interfaces between the systems. This will have to be considered before the
decision to develop the intranet is made, as poor interfaces will limit the
information provision and in some cases increase the time to complete
tasks.

Answers
Group working there may be an opportunity to encourage staff to work

as a group or on a virtual team, with the use of discussion boards and chat
rooms. This may enable staff to have a greater understanding of each
others tasks and responsibilities. This may facilitate the sense of loyalty
and identification which the staff may feel. This is especially important for a
geographically dispersed company such as DGB.
Corporate resource the information collated on the intranet will enable
DGB to gather information which relates to the operations of the business,
such as sales and marketing. The managers at DGB will be able to search
the information to determine which customer or dealer provides the most
revenue, therefore targeting the marketing efforts on these particularly
important companies.
Other issues include:
Interface with other systems within DGB, e.g. legacy systems; this will
increase returns of the investment made in the intranet, such as the
opportunity to generate revenue with the development of an extranet.
Presentation in a user-friendly format increasing the skills of staff.
There may be concerns from staff that working practices may change,
resulting in a lack of support. This would reduce the chance of
successful implementation. This is particularly important, as there will
be a change in culture in relation to the way that staff interact and
work with each other.
10.7 MARKETING AND SELLING CHANNELS

a) For suppliers
A marketing and sales channel available to users 24 hours a day, 7
days a week.
Products can be sold to customers anywhere in the world, provided
that there is a reliable distribution channel.
Ability to respond immediately to customer requests.
Customers can access up-to-date information about products on the
suppliers website.
Direct mailing by e-mail is cheaper and more efficient that direct mail
marketing by post.
It is cheaper to operate an on-line marketing and sales operation than
to open a retail outlet.
Electronic products can be delivered immediately to customers
anywhere in the world.
Can be linked easily to a system for recording management
information about sales.
b) For customers
A convenient 24/7 method of shopping.
Easy access to a large number of potential suppliers
Ability to shop around for the best deal (for example, the lowest price)
Fast service
Convenience of immediate delivery for electronic products

10.8 CURTAIN-UP
(a) To provide information about theatres on their website. Theatres may have
linked websites, or a joint website for theatres in the same commercial
group. The information will relate partly to the theatres themselves (and
their location) but will provide details of what is on.
(b) To allow customers to buy tickets on line, choosing the date and time of the
performance, reserving the seats and paying for the tickets.
(c) To monitor traffic (hits at each website) and so assess customer interest.
(d) To register customers who are interested in receiving information about
future shows, and e-mail information to these customers who are willing to
receive it (direct marketing).
(e) Perhaps also obtain customer feedback about performances.
There are other opportunities for electronic marketing. For example, theatres
could link with travel firms, hotels and restaurants to offer holiday breaks to
customers as a joint package of services and entertainment.

Answers
CHAPTER 11 RECRUITMENT
11.1 INTERNAL PROMOTION AND TRANSFER
The advantages of promotion from internal sources, for the tractor division
are:
(i) Improvement of Morale The internal transfers and promotions would
provide an impetus to the morale of the workers. They would feel assured
that the company has a policy to provide opportunities to the existing
employees rather than to outsiders.
(ii) Proper Evaluation of Employees - The management is in a better position
to evaluate the performance of existing employees before considering
them for higher positions. The past performance of existing employees is a
better guide to their skills, competency levels and commitment as compared
to interviews with outsiders.
(iii) More effective team work - Since the existing employees know the middle
and senior level managers, they would be motivated to put in their
maximum efforts leading to more effective team work.
(iv) Cost-effective - Internal transfer from within the organization is less costly
than recruitment from external sources.
The disadvantages of transfer and promotion from the automobile division
are:
(i) Absence of Fresh Ideas - Transfer from internal sources prevents
introduction of fresh blood and new ideas which are essential for
innovations.
(ii) Biases and Personal Preferences of Managers- The managers may not
necessarily promote deserving employees strictly on merit because of their
personal likes and dislikes for certain individuals.
(iii) Limitations on the number of employees to be transferred Since the
transfer has to be made from within the organization, the number of
individuals who are eligible to apply would be restricted. The individuals
outside the organization who are more talented would not be given an
opportunity to serve the organization.
(iv) Rather than being motivated to work hard, employees may become
complacent because of their assured promotion and seniority.
11.2 HIRING
In order to recruit a suitable candidate for the position of General Manager,
Marketing, I will examine and seek the following managerial competencies:
(i) Communication Competency: The ability to effectively transfer and
exchange information with senior management and subordinates as well
as other stakeholders.
(ii) Planning and Administrative Competency: The ability to plan and
organise activities and make decisions especially related to resource
allocation, costs, etc.
(iii) Teamwork Competency: The ability to complete the tasks through
individuals who have to work collectively in a team environment.

(iv) Strategic Action Competency: The ability to understand the overall

mission and strategies of the organization and be able to achieve the
objectives of the company.
(v) Global Awareness Competency: Ability to explore and seize business
opportunities. The Marketing Manager should have knowledge of different
cultures and a receptive and open mind.
(vi) Self-management Competency: The General Manager should have a
sense of integrity and good ethics and be willing to accept
responsibilities.
11.3 QUALITIES OF RECRUITER AND JOB AD

(a) A skilled recruiter should:
(i) Possess knowledge about the job to be filled The recruiter should
have a clear understanding of the job and be able to ascertain
whether it is necessary to induct a new employee or the work can be
handled adequately by reorganizing or reallocating other jobs. If the
job is necessary then the duties and responsibilities attached to the
job should be clearly spelt out.
(ii) Possess insight in the attributes and qualities of the individuals to
perform the job The recruiter should be aware of the qualifications,
experience and skills necessary to perform the job.
(iii) Have knowledge of the sources and the means of attracting a range
of suitable candidates In case it is necessary to recruit from external
sources, the recruiter should be aware of the sources where suitable
applicants are available, identify the potential candidates and adopt
appropriate methods of recruitment.
(iv) Possess skills to evaluate the candidates who are most suitable for
the job The recruiter should have insight in the methods of obtaining
information about the candidates and be able to apply the appropriate
methods for selection of the right candidate.
(b) The advertisement should contain the following information:
(i) Requirements of the job specifications stating main tasks to be
performed and the responsibilities associated with the position.
(ii) Outline of the hospitals network and its reputation, working
conditions, the facilities available in the hospital and professional
capabilities of the staff.
(iii) Location(s) at which the technicians would be posted.
(iv) Compensation package including fringe benefits.
(v) Specifications of job requirements such as education, professional
training, particular skills and experience.
(vi) Name /designation of the individual to whom the application should
be sent and last date for receipt of applications.

Answers
11.4 CRITICAL SKILLS AND COMPETENCIES

The critical skills and competencies required for the position of Director Public
Relations and Media Affairs of SHPL are:
(a) good understanding of SHPLs mission, goals and objectives and the ability
to communicate them to all the stakeholders
(b) deep understanding and insight of the role of the various media channels in
projecting a positive image of the reputation and standing of SHPL
(c) demonstrable track record and experience in media relations and media
contacts to handle unforeseen situations which may affect SHPLs
reputation and image
(d) excellent interpersonal and communication skills with ability to deliver
messages by adopting appropriate styles, tools and techniques depending
on the type of information and the intended recipients
(e) good management and organisational skills and be able to prioritise and
plan activities taking into account factors such as deadlines and resources
(f) work closely with senior level executives as an effective member of the top
management.
(g) assimilate complex information and take independent action where
necessary and handle multiple projects and work demands at a time
(h) excellent writing skills with a high level of capability to attend to details
(i) qualities of leadership and a positive frame of mind
(j) proficient in developing web-site content ,maintenance and supporting the
in-house broadcasting department
11.5 RECRUITMENT AND SELECTION PROCESS

The stages in the recruitment and selection process are as follows, after a job
vacancy has been identified.
Job description. Prepare a job description, setting out details of the job
such as the tasks and responsibilities of the job, its location, the rate of pay
for the job and so on.
Person specification. Prepare a person specification, setting out the
characteristics or personal qualities that the job holder will require in order
to do the job well.
Advertise the job vacancy. The vacancy should be advertised, and
applicants invited to apply. The advertisement may be placed directly in an
advertising medium such as a newspaper, magazine or journal, or it may
be advertised through an external employment agency. Alternatively, the
job may be advertised internally within the organisation, on the intranet
website or in the organisations in-house magazine.
Application form. Applicants should submit their applications on an
application form (or possibly in the form of an application letter). This
provides some information about the applicant, and may be used as a first
screening device for example to reject applications immediately in cases
where the applicant is clearly not suited to the job.
Selection process. This may take the form of interviews, or tests, or a
combination of interview(s) and test(s).

Selection decision. The preferred applicant is selected. A short-list of

acceptable candidates may be drawn up, in the event that the preferred
applicant turns down the offer.
Offer procedure. The preferred candidate should be offered the job,
subject to satisfactory references. When the job offer has been accepted,
unsuccessful applicants should be notified and thanked for their interest in
the vacancy. On acceptance, a formal contract of employment should be
prepared by the employer.
11.6 APPLICATION FORMS

Recruitment
Application forms are used in the recruitment process to enable individuals to
submit an application for a job. It is the first communication from the applicant to
the employer, and provides the employer with a basic amount of information
about the applicant including contact details.
Application forms are convenient for an employer because they require all
applicants to provide the information that the employer requires.
Selection
Application forms are used in the selection process.
They are often used for an initial screening of job applicants. When there
are a large number of applicants, the information provided on application
forms is used to identify the individuals who should be interviewed and
those individuals whose application should be rejected without interview.
The information on an application form can be used as a basis for asking
further questions at selection interviews.
11.7 INEFFECTIVE INTERVIEWS

The potential consequences of ineffective interviews might be any of the
following.
Failure to identify any suitable candidates for a job.
Offering the job to an individual who is not suitable, and who will do the job
badly.
Offering the job to someone who is adequate, but not the best from
amongst all the applicants who were interviewed.
Offering the job to the best candidate, who rejects the offer and takes a job
somewhere else.
In strategic terms, ineffective interviewing means that the organisation will not
have the best quality of employees that it would have had if its selection
processes had been more effective. This will affect the efficiency and
effectiveness of the organisation in the long term, and reduce its
competitiveness.
11.8 HUMAN RESOURCES PLAN

The current work force and the expected work force in five years time
should be analysed. The work force should be divided into employees with
different skills and at each level of seniority within the management
hierarchy.

Answers
For each category of employee currently employed, an estimate should be

prepared of how many will leave each year, and how many are likely to be
promoted or transferred to a different job within the company.
An estimate can therefore be made of the likely numbers of employees in
each type of job (= current numbers minus leavers plus numbers promoted
or transferred into the job), assuming that there is no external recruitment.
The difference each year between these employee numbers and the
number of employees required will give us a gap to be filled with external
recruitment or faster internal promotion.
In the case of IT staff, where staff numbers will fall, the analysis may show
that some staff may have to be made redundant.
The HR plan can then be used to formulate strategies or plans for
recruitment, transfers, re-training and redundancies.
11.9 EMPLOYEE TURNOVER

AEL would experience the following disadvantages due to the exceptionally high
rate of employee turnover:
(i) Loss of important confidential and proprietary information and knowledge of
work processes to competitors.
(ii) Disruptions and delays in manufacturing operations as new workers would
have to be recruited and would require training to learn the work processes.
(iii) Deterioration and inconsistency in the quality of the products as the new
workers would require time and hands-on experience to acquire the levels
of proficiency and skills necessary to manufacture precision earth drilling
tools.
(iv) Effort and cost incurred in training of employees who leave the organisation
are irrecoverable losses. Additional effort and costs would be involved in
the training of new workers who would replace the outgoing workers.
(v) The new workers would require time to assimilate in the Companys
organisation culture.
(vi) Additional costs of placement of advertisements, background verification,
medical examination and conducting interviews would have to be incurred
in the hiring of new workers.
(vii) Staff morale and motivation would be adversely affected which would
create a sense of insecurity among the remaining workers and result in low
employee productivity.

CHAPTER 12 TRAINING AND DEVELOPMENT

12.1 PERSONAL DEVELOPMENT PLAN
(a) Personal Development Plan is a plan which outlines the process of
improving and upgrading ones work skills, knowledge and capabilities in
order to enhance its effectiveness and adaptability. Personal Development
Planning is a continuous process to improve and utilise ones full potential
at each stage of the chosen career path.
(b) The principal advantages of adopting and pursuing a well-formulated
Personal Development Plan are:
(i) continuous appraisal of the individuals career path and upgrading of
skills.
(ii) acquisition and accumulation of new skills thus minimizing the
chances of the existing skills becoming obsolete or redundant.
(iii) continuous monitoring of progress in ones career to ensure that it is
on the right path and taking timely corrective measures, if considered
necessary.
(iv) creating a sense of achievement and commitment to reach the
set targets within specified time-limits.
12.2 SERVICE-ORIENTED SUCCESS

The well-managed serviceoriented companies give high importance to staff
training and development and create a cadre of competent and committed
employees to derive the following advantages:
(i) The cadre of properly trained and competent staff who are fully
knowledgeable of their duties and responsibilities can handle customers in
a highly professional and courteous manner The competent staff inspires
confidence in the customers and helps to retain their loyalty which brings
repeat business.
(ii) Success of even the well-conceived corporate and business strategies of
service-oriented companies depend to a considerable extent on the
competence of their staff at various levels to deal with a variety of
situations where proper handling is of vital importance towards the
achievement of the corporate goals.
(iii) Properly trained and competent employees are able to avoid and handle
accidents and mishaps and contribute towards the safety and security of
customers, other members of the staff as well as the valuable physical
assets.
(iv) A well-trained and competent work force at all levels requires less
directions and supervision and is able to handle the various day-to-day
issues promptly in a responsible manner to the satisfaction of the
management. These companies can operate efficiently with relatively flat
organization structures and lower operating costs.
(v) A competent, committed and motivated workforce is able to create a high
degree of cohesion and team effort among the staff at various levels.
(vi) A well-trained and competent workforce with multi-skilled capabilities is
able to handle varied and different assignments.
(vii) The new inductees who undergo formal training programs are better
absorbed in the culture of the organization.

Answers
12.3 APOLLO ENGINEERING

(a) Training Needs of employees of Apollo Engineering Limited in the different
categories are:
(i) Competent to perform in the present position: These employees
should be provided training by way of lecture sessions and skills
enhancement programs to enable them to be able to handle
assignments in the next stage of competence. Appropriate training
programs for these employees would upgrade their work skills and
retain their motivation levels.
(ii) More than competent to perform in their present positions:
These employees should be provided training opportunities through
participation in seminars, job enrichment and job rotation to assume
greater challenges and to facilitate them to move to higher positions.
In case it is not possible to promote such employees, their job
satisfaction level can be increased by delegation of authority and
responsibilities and redesigning their jobs. Such measures will
increase their level of motivation and deter them from seeking job
opportunities elsewhere.
(iii) Not yet competent to perform in the present position: The
specific areas of weaknesses of these employees should be
identified and on the job training should be provided to enable
them to overcome their weaknesses and perform efficiently. Since
employees in this category are not incompetent, providing proper
training through lecture sessions, workshops and on the job training
would improve their skills and help them to achieve competency in
their present positions.
(b) The Employee Compensation and Reward system for a service-oriented
company operating in a competitive business environment should be
designed to achieve the following objectives:
(i) Obtaining support of employees for the main strategic objectives of
the service- oriented company for innovation, efficiency, teamwork
and high standards of customer service.
(ii) Building of a durable and mutually beneficial long-term relationship
between the employer and the employees.
(iii) Deriving significant value-addition at all the stages of customer
service chain because human resources are strategic assets of a
service-oriented company and personnel costs account for a
substantial portion of the total administration costs.
(iv) Inducting and retaining a pool of suitably skilled and motivated work
force.
(v) Inculcating a sense of financial transparency and fairness of the
compensation and reward system among the employees.
(vi) Articulating in precise terms the organizations expectations of
employee performance and service standards to create a competitive
business advantage.
(vii) Aligning the compensation and reward packages with the
comparative packages offered by the competitors.

12.4 TRAINING AND DEVELOPMENT

Training involves providing a means by which employees can acquire new
knowledge and skills. Although much training is done outside the work place, on
the job training is also common. The aim of training is that employees should
acquire some identifiable skills.
Development is a process usually associated with individuals at a management
level (or trainee management) within organisations. The purpose of development
is to increase the experience and improve the judgement of an individual, so that
the individual is able eventually to progress to a higher level or more responsible
level within the organisation. Development is achieved largely through work
experience. An individual is developed by gaining experience of different aspects
of work, perhaps through (1) job rotation or (2) by standing in for a boss when the
boss is absent from work, or (3) by assignment to special project work or (4)
secondment to other departments.
Whereas training should have an identifiable learning objective, the aims of
development of an individual are more difficult to specify and often take longer to
achieve.
12.5 ANALYSIS AND REDESIGN

(a) Job enrichment involves putting more responsibilities or opportunities into a
job so that it becomes more satisfying for the job-holder. This may involve
delegating more decision-making authority to the job-holder, or it may
involve giving the job-holder more opportunities for working with other
people.
Job enlargement involves giving more tasks to the job-holder, and a wider
range of activities or responsibilities. The job-holder therefore has more
things to do, but all the different tasks are at the same level of competence
and responsibility.
Job rotation means moving an individual from one job to another, in order
to gain experience of all the jobs in a department or section.
(b) Job rotation does not involve any re-design of jobs. However, both job
enrichment and job enlargement could be objectives of a job analysis and
job re-design exercise.

Answers
CHAPTER 13 APPRAISALS AND WORKING ENVIRONMENT

(a) The objectives of promulgating comprehensive laws for the health, safety
and security of the workers are:
(i) To encourage employers and employees to reduce hazards in the
work place and to strengthen the health, safety and security
programs.
(ii) To establish minimum safety and health standards, particularly in
hazardous industries such as steel, mining and construction.
(iii) To create an effective framework for enforcement of the regulations.
(iv) To frame procedures for reporting of job related accidents, injuries,
illnesses and deaths.
(v) To prevent employment of child workers.
(vi) To provide special facilities for female workers.
(b) Responsible Management can reduce the risks of industrial accidents by
adopting the following measures:
Human Factors:
Strict compliance with safety rules
Proper operation of equipment
Avoid excessive overtime
Environmental Factors:
Good housekeeping
Proper ventilation
Adequate lighting
Mechanical/Technical Factors:
Safe storage and handling of inflammable materials
Proper tools and equipment
Adequate protective equipment or mechanical guards
13.2 LABOUR WELFARE POLICIES

The introduction of welfare-oriented labour policies would offer significant
benefits to OCL by way of:
(i) Improvement in goodwill, image and reputation of the Company.
(ii) Increase in efficiency and productivity of the workers.
(iii) More congenial working relationship and better harmony with the workers
union.
(iv) Ability to attract and retain competent and more committed work force.

13.3 APOLLO MINING

(a) The indifferent attitude of management of Apollo Mining Company Limited
towards the workers may be attributed to:
(i) Abundance of workers seeking jobs and comparatively few
opportunities for employment in the area.
(ii) Unsatisfactory enforcement of Mining Rules and Regulations by the
concerned regulatory authority.
(iii) The Management does not believe in ethics, justice and fair play in its
dealings with the workers.
(iv) The Workers and their Union is not fully aware of the rights of the
workers and their bargaining strength.
(b) The management of Apollo Mining Company Limited should take the
following measures to satisfy the demands of the striking workers:
(i) Compensation for the Affected Workers: Management should pay
compensation to the dependents of the workers who have lost their
lives in the accident. Proper arrangements should be made for
treatment, including hospitalization, of workers who have been injured
in the accident.
(ii) Safety Equipment: Management should install proper safety
equipment in the mines and protective personal gear for ensuring
safe working conditions in the mines.
(iii) Formal Safety Training of the Workers: Management should
introduce Safety Training Programs and educate the workers of the
positive results achieved through the introduction and implementation
of these programs.
(iv) Provide Medical Facilities to the Workers: Management should
provide adequate medical facilities, including hospitalization for the
workers and their families.
(v) Group Life Insurance: Management should provide Group Life
Insurance coverage for the workers.
(vi) Social Needs of the Workers: Management should sponsor
recreational and social activities for the workers and their families.
13.4 HUMAN RESOURCE MANAGEMENT I

(a) The Human Resource Management and Planning policies can play an
important role in the achievement of business objectives by:
(i) Determining Requirements of Human Resources: an essential
element of HR Management and Planning function is to ascertain
accurately HR requirements to avoid problems of manpower
shortages, wastages, mismatch of work skills with the job
requirements and redundancies due to over staffing.
(ii) Ascertaining Training Needs: an important HR planning function
pertains to preparation and conduct of training programs to ensure
that a cadre of skilled workforce is available to meet the requirements
of the organization.

Answers
(iii) Career Path Planning for Managers: Career path planning of

trained and experienced officers/managers is essential in order to
retain them and keep them motivated to meet the present and future
requirements of personnel in all management positions.
(iv) Fair Compensation: Fair compensation plans, including fringe
benefits are essential for inducting and retaining a motivated and
performanceoriented team and work force at all levels.
(v) Industrial Relations: Properly conceived industrial relations
strategies are essential for maintaining a skilled and motivated work
force and ensure continuity of smooth operations.
(b) The limitations of Performance Appraisal are:
(i) Performance Appraisals often focus on employees efforts for short-
term rewards rather than on issues that are important to the long-term
success of the organization.
(ii) Supervisors involved in Performance Appraisal often consider them in
the context of reward-punishment exercises and not on the overall
skills and potential of the employee.
(iii) Performance Appraisal is often considered as a routine paperwork
exercise rather than conducting an objective critique of the
individuals performance.
(iv) Individuals being appraised consider the exercise as being biased or
unfair.
(v) Subordinates react negatively when evaluators offer unfavourable
comments.
(vi) Personal biases and inconsistencies of the individual conducting the
Performance Appraisal may undermine the efficacy of the entire
exercise.
13.5 HUMAN RESOURCE MANAGEMENT II

(a) The important functions which have to be performed by the Human
Resources Department of the commercial bank are:
(i) Human Resource Planning
(ii) Recruitment, selection and induction of employees
(iii) Organisation of departments and design of work flows
(iv) Preparation of job specifications and job descriptions of employees
(v) Salary and wage administration, including reward systems
(vi) Planning for posting and transfers of suitable staff in the various
branches
(vii) Training and development of staff
(viii) Measuring and monitoring of staff performance
(ix) Instituting measures for improving motivation and morale of
employees
(x) Succession planning of competent staff
(xi) Handling of employee grievances and complaints
(xii) Employee welfare, health and safety

(xiii) Compliance with employment legislation and other legal

requirements.
(xiv) Maintenance of centralised records of all the branches.
(xv) Ensuring equality amongst all the branches, policies should be
made at central level with equal remuneration and training
opportunities for all the 17,500 employees.
(b) The important Human Resource Management practices which contribute
towards workforce optimization in a manufacturing plant with several
integrated workshops and departments are:
(i) Hiring of Workers: Workers are selected carefully on the basis of
their skills to undertake the specialised jobs they are required to
perform.
(ii) Workforce Planning: The strength of workers in various categories
is determined in anticipation of the expected workload and measures
are taken for ensuring their availability at the required point of time
(iii) Work Processes: Work processes are well-defined and training is
provided to the employees to enable them to perform their tasks in an
efficient manner.
(iv) Working Conditions: The internal working conditions are conducive
for maximum achievement and the management supports high levels
of performance.
(v) Performance Management Systems: Well-designed employee
performance systems are instituted in the organizations which are
communicated and accepted by all the concerned employees.
(vi) Conflict Management: Conflicts due to differences in perceptions,
role ambiguities and competition for resources must be contained and
resolved by management in a fair and equitable manner to promote
team effort for the achieving the organizational objectives.
(vii) Reward System: High level of performance is expected from the
workers and they are adequately rewarded in a transparent manner
for their good performance. Also reduce Staff turnover rate by
providing adequate compensation and support.
(viii) Employee Service: Make sure that the staff is provided with
healthcare incentives, proper maintenance of records and information
system.
13.6 STRESS
Employee-Counselling includes working with individuals to promote and nurture
relationships which are supportive, psychotherapeutic, providing guidance for
dispelling fears and apprehensions and resolving of work-related problems.
The scope of Employee Counselling could be to:
1. help the employee identify areas that need improvement.
2. support the psychological equilibrium of employee
3. Bring in focus the nature of problem
4. explore the impact of the problems and exploring all possible solutions.
5. Create a constructive environment mutually beneficial to employees and
organization.

Answers
Functions of Counselling:
(i) Provide Reassurance:
Offering reassurance to employees by inspiring them and giving confidence
to handle problems and inculcating in them a sense of direction and
purpose in the discharge of their responsibilities and duties.
(ii) Help to release of Emotional Tensions:
Employee Counsellor can help to create a conductive non-critical and
objective attitude by providing suitable opportunities to employees to
communicate and explain their problems to counsellors who are receptive
and sympathetic to the problems faced by the employees so that the
tensions are released.
(iii) Clarification of Thought Process:
Enable employees to clarify their thought process and motivate them to
accept responsibilities and adopt a realistic approach in dealing with work-
stress. It revives the employees level of aspirations and motivates them to
high levels of actual achievement.
13.7 EMPLOYEE COMPENSATION

(a) Employee Compensation Package refers to all forms of pay and rewards
received by the employees for the performance of their jobs, including
cash, bonuses, benefits, facilities and perquisites.
(b) The steps which should have been followed in the formulation and
implementation of a well-conceived Employee Compensation Strategy are:
(i) Identification of the Objectives of the Employee Compensation
Strategy
Compensation objectives should have been identified and
articulated as part of the Banks overall planning process. The
objectives should be in line with the organization's overall corporate
strategy and lead to the creation of a work force that is capable of
implementing its plans.
(ii) Review of Compensation Plan
Examination of the strengths and weaknesses of the existing
compensation policies should have been carried on a regular basis
to enable the management to formulate new or improved
compensation package.
(iii) Identification of the Positions and Prepare their Job Descriptions
Identification of the positions at various levels and precisely
defined job descriptions are essential for the development of a
meaningful compensation program. Job descriptions should be
reviewed periodically to ensure that they are in conformity with the
employee skill requirements, assignments and responsibilities.
(iv) Evaluation of the relative importance of the Positions and their
significance for achieving the objectives of the Bank
Evaluation and comparison of the positions is necessary to establish
their relative importance and the relationship between the
compensation for different positions. The standards must be well-
defined and applied specifically to the positions rather to the
individuals in these positions.

(v) Comparison of the Compensation Packages with the packages

offered by the competitors.
Development of a rational compensation program in accordance with
the competitive environment by collecting relevant data of
compensation packages offered by the competitors. The Bank
should identify the competitors and offer competitive compensation
packages to attract and retain skilled and motivated employees.
(vi) Administration of the Compensation Program
Administration of a comprehensive compensation program to be
applied uniformly for all employees. By adopting formal procedures
and standards, arbitrary or unfair personnel decisions can be avoided.
(vii) Communication of the Compensation Package
Communication of all aspects of the compensation package to the
concerned parties including the employees, supervisors,
administrators and management who must have a thorough
knowledge of the program to avoid any misunderstandings.

The Health and Safety hazards which are faced by workers in typical
manufacturing environment are:
(a) Contact with chemicals and other harmful materials.
(b) Excessive noise and vibrations of heavy machines.
(c) Extreme temperatures.
(d) Poorly designed equipment which affects postures of workers.
(e) Slippery floors and passage ways.
(f) Absence of safety guards on moving parts of equipment.
(g) Poor illumination e.g. light glare, insufficient light.
(h) Improper ventilation.
(i) Lack of safety rules and regulations
(j) Faulty /Outdated safety equipment
(k) Improper machine maintenance
(l) Excessive humidity
13.9 SENIOR HRM

(a) A Senior Human Resource Manager involved in the Formulation and
Implementation of Strategy at the corporate level of a textile mill having
15,000 employees should have responsibilities to achieve the following
objectives:
(i) The organizational structure should be appropriately designed to
achieve the overall corporate objectives. The organizational structure
should capitalise on internal strengths and strive to remove internal
weaknesses which may be impediments to the achievement of the
objectives.
(ii) The companys objectives and goals should be communicated and
well understood by the employees at all levels.

Answers
(iii) The various divisions and departments should work in close

coordination to achieve the main goals and objectives of the
company. Areas of friction and conflict which may undermine
performance should be identified and rectified at appropriate levels.
(iv) The managers at all hierarchical levels should make effective plans to
achieve the business and operational goals and targets entrusted to
their respective departments.
(v) The job descriptions and job specifications should be precisely
defined and clearly understood by the employees at all levels.
(vi) The organizations reward system, including benefits and policies of
promotion should be fair and equitable and designed to achieve
optimum employee performance at all levels.
(vii) The policy issues of training, job rotations, career path and
succession planning should be accorded the necessary degree of
importance and be implemented in an objective and fair manner.
(viii) The employees should be kept fully motivated and their morale and
commitment should be high at all times. The employees should take
pride in their association with the company.
(b) A Strategic Business Unit (SBU) is an independent unit within a large
organization and has its own staff, financial resources and products. A
separate SBU pursues its own marketing strategy and is established on the
premise that a single strategic approach is not always appropriate in a large
diversified organisation which markets different products to serve the needs
of a wide range of customers.
13.10 TEEPEE LTD

Key answer tips
Note the dual requirement in part (a) of this question; you need to explain the
benefits of homeworking and then staff concerns and how to alleviate those
concerns. In all, thats about three different sections to the answer.
The scenario will provide some information for each of these three sections; in
particular the benefits for staff. The concerns may not be so clear, so think of
yourself working at home, and what issues may arise because of this. Some of
the concerns may be alleviated by technology (e.g. communication) but other
problems like interruptions from family may not. You will need to identify and
comment on 3 or 4 of these factors, and show clearly what effect the IT
infrastructure will have on those factors.
Part (b) investigates methods of motivating people to accept change. While there
may be very little information in the scenario about this, try and think of factors
that motivate you at work; similar factors may well work with the staff in this
situation.
REPORT
To: Managing Director
From: A.N. Accountant
Date: 11 November 20XX
About: Home working
Introduction

A proposal was recently made to ask staff to work from home. This met with
some initial resistance from staff, and this report investigates:
the potential benefits to staff from working from home
the concerns of staff
how these concerns could be alleviated by appropriate use of IT
how staff could be encouraged to accept the proposed change.
(a) Potential benefits to staff
The benefits to staff that can be derived from home working are as follows:
Less time wasted commuting and therefore there is more time to pursue
personal interests.
Less stress and expense incurred in travelling.
A more relaxed dress code. Suits, collars and ties will be needed rarely.
More flexible work patterns that can be fitted around family life and other
commitments and interests.
Fewer interruptions and less time wasted by the trivial matters that typically
arise in most offices. The more peaceful and relaxed environment should
mean that tasks are completed more efficiently and effectively.
Assuming there are suitable communication links, staff will have more
freedom about where they live and even how long they can be away during
the holiday season as their business could be conducted from almost
anywhere.
The concerns of staff
Staff realise that the proposed change will have dramatic effects and are
right to be concerned. The level of an individual's concern will vary,
depending on how much they enjoy office life, their home circumstances
and how comfortable they feel with advanced computer systems.
Work plays a very important role in most people's lives. In addition to
providing income, work can also help meet social, ego and self-fulfilment
needs. Home working will greatly reduce social opportunities for staff and
they will meet colleagues only occasionally; they may fear isolation. Ego
needs (the need to be looked up to and respected) will be harder to fulfil in
the relatively solitary world of the home worker.
Staff may feel cut off from important information that they need.
Learning and problem solving opportunities will be reduced. In addition to
formal training, most employees learn a tremendous amount informally by
watching and by discussing problems with colleagues. Often, employees
will learn by listening in on discussions being carried on between two other
parties.
Working from home may have negative effects on home life. The
equipment will have to be sited somewhere in the employee's house; work
time may encroach on private time as there is no longer the formal cut-off
of going home from work.
Some employees may have more interruptions at home than they would
have in the office.
Home working may make career structures more limiting. More people are
working on their own and there might be less management to carry out.
Furthermore, promotion will be on fewer success criteria as the only results
seen by head office will be sales; managerial and human qualities will be
more difficult to display.

Answers
Use of the IT infrastructure

Use of an appropriate IT infrastructure will help to reduce staff concerns,
though some of their concerns will not be addressed in this way. Indeed
there may be no satisfactory resolution of some problems.
The infra-structure can help as follows:
Email will provide easy communication (albeit written) between staff.
Voice and video attachments will make it possible for staff to talk to and see
each other. This will reduce their feeling of isolation.
Communications equipment and software will allow access to data about
customers and the value added network.
Standard letters and forms can be used by the word processor to produce
quotations and other commonly required documents.
The provision of on-line help and electronic performance support systems
will help staff learn on demand (just-in-time learning).
(b) How staff could be encouraged to accept the proposed change
The following should help:
Participation in the decision making process and in the establishment of
new work norms.
It is unlikely that all work can be carried on from home without the need of
meetings or visits to the office. Pointing this out should help to reduce fears
about isolation.
Emphasise the benefits that there should be (see above).
Consider offering help to staff for the establishment of suitable work areas
at home. At the very least office furniture will have to be supplied. If a
separate area is not available, the furniture will have to be carefully chosen
so as to fit in with domestic furniture.
Emphasise that Teepee Ltd will pay for the installation of an ISDN line
which is equivalent to two additional phone lines. One line will be used for
IT; the other as a conventional business line. Help towards additional
heating costs may be appropriate as staff will now occupy their own houses
most of the day.
Additional efforts should be made to arrange out of hours social events to
reduce feelings of isolation and loss of social contact.
Instead of enforcing immediate changeover of all staff, many of whom may
be reluctant to co-operate, it might be possible to ask first for volunteers.
These people could be seen as a pilot operation from which, no doubt, both
staff and the company will learn. Every effort should be made to maximise
the success of this operation so that other staff members will be
encouraged to change also.
Staff will be aware that the company will save money and may expect some
financial inducements to change their work practices.
Conclusion
Home working offers great potential benefits to this organisation but it
represents a fundamental change in the culture and work practices of our
staff, who have legitimate worries. However, by addressing these worries
and attempting to win the cooperation of staff, staff concerns should be
outweighed by the very considerable benefits which should be obtained by
them.

13.11 EVALUATION
The three main elements of staff appraisal are:
Reward appraisal
Performance appraisal
Potential review.
Reward appraisal is an appraisal of what the individuals rewards should be. This
may involve a discussion about what the employees pay will be in the next 12
months, or a discussion about bonus payments or other rewards for the year just
ended.
Performance appraisal involves an appraisal of the employees performance since
the previous performance appraisal. The focus of attention is whether or not the
employee has achieved what was expected of him or her during the period. It may
involve comparing the actual performance of the individual against a formal target or
objective.
Potential review is concerned with how the individual employee has developed
and with his or her potential for further career development in the future. The
focus of attention is on the prospects for promotion and development, and with
what might be done to improve the individuals prospects or opportunities.
All three aspects of appraisal might be dealt with in the same appraisal interview.
However, it is often argued that the reward appraisal should be separated from the
potential review, and possibly also the performance appraisal. If all three aspects are
discussed in the same review, it is probable that the reward appraisal will dominate
the conversation, possibly to the exclusion of the other two elements of the appraisal.
13.12 ABILITIES
The competence of an employee is his or her ability to perform at an appropriate
standard. An employee is competent if he or she can perform certain tasks at a
suitable level of ability.
Competence might be assessed either by:
identifying standards of competence or levels of competence, and then
comparing the individuals actual performance with those standards, or by
comparing the performance of employees with the performance of their
colleagues.
Standards of competence can be established for different aspects of work. For
example, some professional bodies with examination systems identify the levels
of competence that they expect examination candidates to demonstrate in their
examination, in order to obtain a pass mark. The required levels of competence
in different subjects and topics may vary from a basic understanding
(demonstrating knowledge) up to an ability to analyse and evaluate a fairly
complex problem and put forward recommendations.
Setting standards of competence in the work place calls for a careful analysis of
jobs and the actual requirements of the job. An employee is judged competent if he
or she can perform the tasks that are required to do the job to a satisfactory
standard.

Answers
CHAPTER 14 STRATEGIC PERFORMANCE MEASUREMENT

14.1 PERFORMANCE INDICATORS
The performance indicators to measure the success of marketing strategy of
Euro Motors Limited which is engaged in the business of manufacturing and
marketing of automobiles in a dynamic and highly competitive business
environment may be as follows:
(a) Growth in sales revenue
(b) Increase in market share.
(c) Percentage increase in sales achieved through customer retention/brand
loyal customers.
(d) Product development speed time i.e. time to develop, manufacture and
market a new product.
(e) Number of customer complaints lodged. Percent increase/decrease in
number of customer complaints.
(f) Number of new distributorships appointed in the year.
(g) Sales of new products / models lodged in the year as a proportion of
the Companys annual turnover.
14.2 CRITICAL SUCCESS FACTORS

The Critical Success Factors which would create sustainable long term
competitive advantage for FCL and enable the company to obtain a firm
foothold in the target market are:
(i) Management and Organizational Competence:
The knowledge, skills and attitude of the management relating to
understanding of the home textile industry, the objectives and role of FCL,
including insight in FCLs strengths and weakness and pursuance of
appropriate corporate and business strategies to achieve the objectives
would be critical success factors .The management of FCL would have to
develop necessary competence for identifying opportunities, formulating,
implementing and monitoring sound corporate strategies, creating a
supporting organizational structure and mobilizing resources.
(ii) Manufacturing Capability and Production Process:
FCL should acquire and develop the best manufacturing capabilities and
introduce sound technical processes. It needs to manufacture products
which would satisfy the needs of its customers who want new and better
products at affordable prices.
(iii) Skilled and Motivated Employees:
FCL must adopt sound policies relating to hiring, training, development,
performance evaluation, working environment and compensation of its
employees. These policies would promote motivation and commitment of
the employees at all levels towards the achievement of the objectives of the
company.

(iv) Marketing Know-how and Promotion Strategies:

Market research and knowledge of the target market is essential for
sustained growth in sales. Marketing programs would have to be developed
to meet the needs of the customer groups. Company-owned retail outlets
would enable FCL to achieve high rates of sales turnover through finely
tuned marketing policies and also retain high profit margins which
otherwise would be demanded by prominent retailers. Ability of the
Institutional Marketing Division to develop a supply chain of reliable vendors
who can manufacture products of the required specifications to be sold to
the institutional customers would also be a critical success factor for FCL.
14.3 OBJECTIVE EVALUATION

Current Market Size: Economic Stability:
(i) Population Size and Growth (xi) Balance of Payments Position
(ii) GDP Size and Growth (xii) Taxation Policy
(iii) Domestic Production of (xiii) Monetary and Trade Policy
Appliances Regulations
(iv) Volume of Import of
Appliances
(v) Sources of Import of
Appliances
Market Accessibility: Miscellaneous :
(vi) Import duties and tariffs (xiv) Non-tariff barriers
(vii) Existing distribution channels (xv) Attitude towards Chinese
products
(viii) Pricing methods and credit (xvi) Political stability
terms
(ix) Promotional and advertising (xvii) Cultural differences within the
practices country
(x) Resourcefulness of potential (xviii) Level of education
distributors
14.4 NON-FINANCIAL PERFORMANCE INDICATORS

Service quality
(1) The percentage of customers who take their account away in a period (the
rate of churn)
(2) The number of complaints in a period
(3) A measure of satisfaction from responses by customers to a questionnaire
about the banks services
(4) In some aspects of service, speed of response (for example, the average
time to answer telephone calls from customers: these time measures can
be obtained from the banks telephone systems).

Answers
Marketing effectiveness
(1) The number of new accounts or growth rate in new accounts in the period
(2) The growth in major business activities in the period (lending, foreign
exchange dealing, and so on)
(3) Market share
Personnel
(1) The rate of absenteeism in the period
(2) The amount of staff training in the period (total training days, for example)
(3) The rate of staff turnover
(4) It might be possible to identify ways of measuring staff efficiency, but this
can be difficult when much of the work is non-standard or non-routine.
14.5 BALANCED SCORECARD

(a) The four perspectives for performance targets and measuring performance
in a balanced scorecard approach are:
(1) a customer perspective: identifying what customers value most
(2) an internal systems perspective: identifying the processes that must
be performed with excellence to satisfy customers
(3) an innovation and learning perspective: what must the organisation
do to innovate or add to its knowledge and experience?
(4) a financial perspective.
(b) A professional football club
Here are some suggestions
Customer perspective
Customers value:
results, winning
an enjoyable time at football matches: being entertained (for example,
with food and drink).
Targets for performance might be:
the size of attendances at matches
results (points, position in the league table, promotion)
revenue from catering: number of meals sold before matches.
Internal processes perspective
Processes that must be excellent to support customer expectations might
include ticket selling, getting customers into the ground quickly on match
days, catering efficiency, effective security and policing, and so on.
number of season ticket sales
targets for number of spectators per minute going through each
turnstile
speed of producing meals in the catering area

number of incidents and police arrests on match days.

Innovation and learning perspective
Value can be created by developing well-trained footballers through
coaching and training, and possibly selling them in the transfer market to
make profits.
average fitness levels for players
average number of hours of training each week per player
revenue from transfers
Financial perspective
Presumably, the football club will be expected to make profits for its
owners. Targets for performance might be profits each year, and return on
investment.
Subsidiary financial targets might be average wages per player, and
revenue from sponsorship deals.
14.6 KEY SUCCESS FACTORS

(a) (i) Low-cost operations (allowing the airline to offer low-cost flights to
passengers)
(ii) The development of a route network (using secondary airports),
avoiding direct competition with other low-cost airlines
(iii) Brand development and successful marketing (for example, selling
direct to the customer and avoiding the cost of the middle man such
as travel agents).
(b) Suggestions for an answer
Financial targets Customer satisfaction targets

Return on capital employed Number of complaints
Financial gearing Amount of compensation payments
Average revenue per % of customers who are repeat
seat/kilometre customers
Gross profit margin per
seat/kilometre
Targets for the enhancement of Targets for learning and growth
internal processes
Targets for aeroplane load factor Route network development
Punctuality targets targets
Targets for avoidable delays Average time for a new route to
break even
Targets for the conversion ratio of
enquiries into sales Career progression rates for
employees in the company
E-commerce performance targets

Answers
CHAPTER 15 PROJECT MANAGEMENT

15.1 MISCELLANEOUS TERMS
(a) Network: A network is a schedule of the work for a project, showing all the
tasks that have to be completed, the inter-dependencies between them and
the time-scale for completing them. A network is shown as a diagram or
chart.
The network chart will also indicate the tasks that must be started and
completed at the earliest time possible, in order for the project to be
completed in the earliest possible time.
There is a chain of critical activities, one following immediately after the
other, that must all be started and finished at the earliest possible time in
order to complete the total project within the minimum time. This chain of
time-critical activities is the critical path.
Critical path: The critical path consists of the sequence of activities that
must begin at the earliest possible time (and so must also be completed at
the earliest possible time) so that the project as a whole will be completed in
the minimum possible time.
When drawing a network diagram, activities on the critical path go through
events where the earliest and the latest event times are the same. It is usual
to indicate the critical path by drawing two lines (//) across each activity on
the critical path in a network diagram.
Float: Float is the spare time available to activities in a network diagram
such that the overall duration of the project will not slip. For example, an
activity with a float of 3 days could be delayed for 3 days without impacting
the overall project delivery.
It follows then that there is zero float for each activity on the critical path.
(b) The advantages of Gantt charts compared to network analysis are that they:
are much simpler than network analyses to construct;
are easier to understand for project stakeholders; and
provide a useful overview of the project including completion times
and employee numbers.
However, Gantt charts do not show the interrelationships between different
activities as clearly as network analysis, hence the popularity of network
charts amongst project managers.
15.2 QUALITY, TIME, COST AND THE ACCOUNTANT

(a) The quality of the work carried out for the project development can be
monitored by comparing actual achievements against the requirements that
are set out in the project quality plan.
The completion time for the project can be monitored by comparing the
planned completion times for the critical path activities with the actual
completion times.
Costs can be monitored by comparing actual expenditure with budgeted
expenditure, on a regular basis (for example, in monthly budgetary control
reports).
(b) The numeracy and business skills of accountants are highly valued in
project management. Project accountants:

understand the economics of different options and decisions and can

therefore support the project manager in making decisions;
can use their forecasting and modelling skills to build forecast costs
and profit based on different future scenarios;
can assist in generating accurate network analyses and Gantt charts;
are able to assist in considering the impact of external factors as well
as internal factors relevant to the project.
Accountants bring a wealth of business experience to projects and can be
highly effective as either project managers or as advisors to project
managers.
15.3 PROJECT PLANNING

The development of a computer system involves many different types of activities
that together make up a project, which must be carefully planned if it is to be
successful.
Planning includes the activities required to select the project team, identification
of the tasks which need to be performed, assignment of members of the team to
those tasks, estimating the times required to complete tasks, and installing
feedback procedures to enable progress to be measured.
A structured approach is useful in breaking the project down into analysis, design
and implementation. Then breaking analysis down into fact-finding, data flows,
proposal preparation; design into data entry, input/out and data design; and
implementation into file conversion, training, testing, changeover and evaluation.
Subsequently the analyst takes each of the above and decomposes them further.
The final level of detail reached depends on the project, but all critical steps need
to appear in the plans.
Usually, the most difficult part of project planning is the crucial step of estimating
the time it will take to complete each task. Experience is the key factor here.
Uncertainty can be reduced by projecting most likely, pessimistic and optimistic
estimates, and then using a weighted average formula to determine the expected
time a task, or activity, will take.
Two commonly used techniques for scheduling are:
(i) Gantt charts
This is essentially a chart on which bars represent each activity, the length
of the bar representing the relative length of the task. The main advantage
of the Gantt chart is its simplicity - not only is it easy to use, but it also lends
itself to communication with users. Another advantage is that the bars
representing activities are drawn to scale.
(ii) Network analysis diagrams
A project is represented by a network of nodes and arrows, then evaluated
to determine the critical activities, improve the schedule if necessary, and
review/revise once the project is underway. Network analysis is useful
when activities can be done in parallel rather than in sequence. The longest
path through a network is referred to as the critical path; this is the path
which will cause the whole project to fall behind schedule if any delay is
encountered on it. Unlike other paths, there is no leeway, or slack time.
As well as managing time and resources, the analyst must also manage
people, this implies the ability to communicate both to the project team and
to users, with the need to motivate both groups high on the list of priorities.

Answers
Productivity goals have to be set for team members which reflect both the
nature of the activity and the ability and experience of the team member.
Motivation is also very important, and can be at least partially achieved by
acceptable goal setting.
15.4 PROJECT MONITORING AND REVIEW

Key Answer Tips
When you are asked for a list of key points, particularly where you are asked to
expand on each of the points in some way, it might be helpful to jot down all the
points as they come to you before you begin writing out your full answer. What
tends to happen is that several points come to mind as you finish reading the
question, but once you have finished fully explaining your first point, you may
have trouble remembering the other points that you had originally thought of.
(a) The following factors should be considered in reviewing the current status
of the project:
Time The progress reports should be reviewed to determine
whether or not the project is currently on target. An assessment
should be made as to whether the remaining tasks can be completed
by the original deadline.
Resource Identify the resources that have been allocated to the
project, both human resources and other, such as computer
equipment. An assessment should be made as to the effectiveness of
these resources in achieving the project goals.
Cost Obtain the original budget for the project and review this in the
context of the actual costs incurred to date. Try to make a sensible
estimate of the further costs that you think will be incurred in
completing the project.
Quality Review the project plan to determine whether or not any
quality standards were agreed for the intermediary stages of the
project, and if so, establish whether or not these standards are being
met.
(b)
Possible Threat Minimise by:

Poor management Ensuring that the project managers are properly
trained with a proven track record.
Poor planning Using a sensible planning method/tool e.g.
Gantt charts, network analysis
Lack of control Ensuring that there are appropriate progress
mechanisms report deadlines throughout the project
Unrealistic deadlines Identifying the critical activities of the project
and ensuring that they do not slip
Insufficient budget Ensuring that the best value for money is
sought and that compromise on cost is made
on the least critical areas first
Moving targets Ensuring that the task is fully understood at the
outset so that the project specification is as
accurate as possible

CHAPTER 16 IDENTIFYING AND ASSESSING RISK

16.1 REPUTATION RISK
(a) Reputation risk for a company is the risk that an event or item of
information will damage the standing (reputation) of the company in the
opinion of other people. Reputation risk is normally regarded as a
downside risk, but a company might use its public relations department to
try to improve its general reputation.
The main source of reputation risk is the activities of the company. A
company might engage in activities that damage its reputation in the
opinion of customers, a portion of the general public, the government and
possibly investors, suppliers and employees. For example, companies that
conduct scientific research using live animals attract the hostility of animal
rights activists.
Employees might also be a source of reputation risk, by behaving rudely to
customers or the general public. Some companies, for example, have a
poor reputation for dealing with requests to a call centre from customers
asking for help.
Some companies have suffered damage to their reputation from the
activities of suppliers, for example by purchasing supplies from
manufacturers who use child labour.
The impact of an event on reputation risk can be substantial when the
event is publicised in the media, such as television or the newspapers.
(b) The effect of reputation risk is difficult to predict, and adverse effects may
be either short-term or long-term. In a large global company, the effect of
reputation risk may also be localised, because an event that damages the
companys reputation in one part of the world might not be considered so
bad in other countries.
A reputation for unethical selling or poor quality can have a lasting
impact on customer demand. Some years ago, the owner of a chain
of jewellery stores in the UK criticised the poor quality of the goods
sold in his stores. The effect was a very large fall in sales for the
group, and the company had to change its name as one measure for
overcoming the reputational damage.
Reputation can affect the choice of one producers goods or services
in preference to another. For example, a reputation for high prices or
poor quality, compared with rival products, can be damaging for
sales.
A bad reputation can make a company a target for pressure groups
and activists.
In some cases, damage to reputation can lead to intervention by the
government, which may introduce new laws or regulations.
16.2 TECHNOLOGY RISK

There are several ways in which a company might be affected by technology risk.
There is a risk that a company might fall behind in the use of new
technology in its operations. If the new technology is successful, rival
companies might gain a competitive advantage by making earlier use of the
technology. There is also a risk that a company might decide to invest in a

Answers
new technology, only to find that it is much less popular than expected with
customers.
There is also a risk that a company might fall behind its rivals in the
development of an existing technology, such as the use of new versions of
computer software.
Occasionally, there may be two different technologies to choose from, and
there is a risk of choosing the technology that will prove inferior. This risk
can affect companies that manufacture products (such as high definition
digital televisions) and have to choose between the rival technologies for
sin gin their products.
The potential cost of investing in new technology can be a serious risk for
profitability.
Technological risk is greater when the pace of technological change is faster.
Many companies are facing greater technological risk than in the past, as the life
cycle of products appears to get shorter.
16.3 LIQUIDITY RISK

Liquidity is cash or ready access to cash. Liquidity risk for a company is the risk
that it will not have sufficient cash, or ready access to sources of cash, to settle
liabilities when they fall due. Faced with a liquidity crisis, a company might be at
risk from insolvency.
Sources of ready cash are near-cash assets, such as money market securities
that can be sold quickly in the financial markets to obtain cash. Companies
sometimes invest surplus cash in money market securities (rather than holding
on to the cash) because securities earn interest.
Another source of liquidity is an available line of credit from a bank, such as an
overdraft facility or a revolving credit facility. In the past, however, a problem for
some companies has been that when they have been faced with a liquidity
shortage, their bank has withdrawn an overdraft facility. When the companies
needed the liquidity most, their banks took away the line of credit.
An essential requirement for liquidity risk control is careful cash budgeting or
cash forecasting. Companies should keep expected cash inflows and payments
under continual review. Forecasting cash flows will help a company to anticipate
temporary cash shortages and to take measures in advance to deal with them,
such as delaying non-essential expenditures or negotiating an overdraft with a
bank.
Companies should also avoid taking actions that could create long-term liquidity
problems, such as regularly paying for capital expenditures out of operating cash
flows, when the company cannot afford this.
Efficient working capital management can also help to improve cash flows and
reduce liquidity risk. In particular, companies should avoid investing in slow-
moving inventory, and should have efficient procedures for collecting receivables.
16.4 MARKET RISK AND DERIVATIVES RISK

Market risk is risk arising from unexpected changes in the market price of items
or in market rates. The risk is higher when market prices are volatile, and subject
to large and unexpected movements both up and down.
For the treasury department of Sham Group, there is an exposure to market risk
for any assets or liabilities whose value fluctuates with changes in market prices.

It might invest in shares of other companies or market instruments whose value is

linked to the market price of commodities. If so, it has an exposure to market risk,
because share prices and commodity prices might change unexpectedly,
creating profits or losses.
The treasury department might also hold investments or have liabilities whose
value is affected by changes in foreign exchange rates or interest rates. For
example, it might hold bonds as investment, and the market price of bonds varies
with changes in long-term interest rates. Similarly the department might hold
investments denominated in a foreign currency, and the value of these
investments will change (in the departments reporting currency) with changes
the currencys exchange value.
The head of the treasury department is likely to insist that the department sets
limits to its exposures to market risk, and the treasury team will not be allowed to
deal in the financial or commodity markets in a way that exceeds the risk limits
that have been set.
Derivatives risk is the risk of unexpected gains of losses on trading positions in
derivatives. Derivative instruments, such as options, futures and swaps, can be
used to hedge exposures to risk and reduce residual risks. In the case of Sham
Group, it seems probable that the treasury team can trade in derivative
instruments with the intention of making a profit.
Gains or losses on derivatives depend on changes in the market value of the
underlying items to which the derivatives relate, such as share prices, commodity
prices, interest rates, exchange rates and bad debts (credit default swaps). A
significant risk with trading in derivatives is that a relatively small investment in
derivatives can create an exposure to major losses if the underlying market
prices move adversely.
There have been reported cases in the past where treasury departments of
companies or government organisations have suffered severe losses through
speculation in derivatives.
Trading positions in derivatives need to be monitored regularly, and trading limits
should be set to restrict the exposure to losses to a level that the treasury
department considers acceptable.
16.5 RISK MANAGEMENT

The main function of a charity is to raise money for spending on the charitable
cause. Key objectives should therefore be (1) to raise a sufficient amount of
funds and (2) to spend the funds effectively.
A major risk must be that Labcoats will have difficulty in raising enough funds to
invest in the research projects that it would like to support. There are three other
charity organisations that might, to some extent, be competing for funds from the
same sources. One of these other charity organisations, Medhelp, is much larger
and is presumably much more successful at raising funds, from private and
government sources. The management of Labcoats must therefore consider the
risk that funding will possibly be less than expected, due to competition from
other sources.
The ability to raise funds for the charity could also be exposed to the risk of a
downturn in the general economy (which might reduce funding from private
sources) or in the state of the governments finances (which might reduce funding
from government sources).

Answers
Another major risk is that Labcoats might invest its funds in unsuccessful
projects. Each new research project uses up a large part of its annual funding
income. Unsuccessful projects would mean that Labcoats is not as successful as
it would like to be in achieving its objectives. A lack of success could also
damage the perception of Labcoats as a worthwhile charity, and persuade
individuals and organisations to give their money to Medhelp instead.
There will be some key risks affecting the operational effectiveness of Labcoats.
An important requirement will be the need to recruit and retain individuals who
have the skills that are necessary to make Labcoats successful. For example, it
will need to attract and retain fund-raisers. It is not clear whether Labcoats
employs scientific or medical experts: if it does, recruiting and retaining these
individuals will also be important. The risks are that Labcoats will fail to attract
high-quality individuals, or having recruited talented individuals, will fail to retain
them.
Like any other organisation, Labcoats will face a range of financial risks,
operational risks and compliance risks. The proposal by the new managing
director to improve risk management systems is a very good one.
16.6 MANAGING CREDIT RISK

Exposure to risk
All business activities involve some risks and whenever a risk exists, there is an
exposure to that risk. This means that the actual outcome might be worse (or
better) than expected. For example if a company makes a strategic capital
investment, there is a risk that the investment will make a loss, or will fail to
provide an adequate return.
With credit risk, there is a possibility that when a company gives credit to its
customers, the customer might fail to pay what he owes, and there will be a bad
debt. With credit risk, the total exposure to risk can be measured as the total
amount of receivables.
Risk of losses
When a business entity has exposures to risk, there is a risk that some
unexpected losses will occur if adverse events occur. The amount of the loss that
might occur is rarely the full amount of the exposure. For example, if a company
has an exposure to bad debts, with receivables of Rs.10 million, it is most
unlikely that all the receivables will become bad debts. Even when a customer
becomes a bad debt, some of the debt might be recovered in legal proceedings.
The risk of losses is an estimate of what the losses might be from a given
exposure to risk.
The risk of losses cannot always be measured, but with credit risk, it might be
possible to estimate the risk of losses from an exposure to credit risk as:
Total exposure (= total receivables) Probability of default Loss in the event of
a default
For example, if a company has Rs.10 million of annual sales, there is a 2%
probability of default and in the event of default by a customer only (on average)
25% of the debt will be recovered, the risk of losses is:
Rs.10 million 2% 75% = Rs.150,000.
Residual risk
Residual risk is the risk of losses after allowing for all risk control measures to
reduce or contain the risk. In the case of bad debt risk, the risk might be reduced

through better credit-checking procedures, or more efficient debt collection

procedures. The finance director of Basket Company thinks that the bad debt risk
can be reduced by improving debt collection procedures. If the probability of
default could be reduced to, say, 1.8%, and sales will increase by 20% each year
to Rs.12 million, the risk of losses would be reduced to Rs.12 million 1.8%
75% = Rs.162,000.
Risk appetite
Risk appetite describes the amount of risk (losses) that an entity is prepared to
accept in order to obtain the expected benefits. In this example, if the company is
willing to increase the credit period allowed to customers from 30 days to 60
days, the risk of annual losses from bad debts will rise from Rs.150,000 to
Rs.162,000.
The company must decide whether it has the appetite to accept the risk of
losses of Rs.162,000 in order to obtain the benefits of higher annual sales (Rs.2
million) and the additional profits from those sales.
16.7 RISK MAP AND RISK DASHBOARD

A risk map and a risk dashboard are both simple visual aids to assist
management with the understanding and assessment of risks.
(a) A risk map in its simplest form is a 2 2 matrix, where one side of the
matrix represents the probability that an adverse outcome or event will
occur, and the other side of the matrix represents the amount of the loss
that is likely to occur when there is an adverse outcome.
Loss given an adverse outcome (= Impact)
Low High
High
Probability or
frequency of
adverse event
Low
The concept of a risk matrix is based on the assessment of risk as:

Risk = Probability of adverse event Loss when an adverse event occurs.
A risk map can be used to place individual risks on the map. This provides
a visual aid to understanding the nature and severity of each risk. It can be
useful for management when risks are prioritised and decisions are taken
about how risks should be managed.

Answers
For example, priority for risk management and control should be given to
risks with a high probability of occurring and a large loss when an adverse
outcome occurs. Risks with a low impact and low probability might be
considered acceptable. Measures such as insurance might be considered
for risks with a low probability of happening but a high impact.
(b) A risk dashboard is another visual aid for risk management. There are
different ways of constructing a dashboard, but the basic idea is that it
indicates which risks are dangerously high (coloured red), which are
relatively small (coloured green) and which are somewhere between
(coloured amber). A dashboard can also be used to indicate the current
exposures to the risk (residual risk) and the risk appetite of the company
for accepting exposures to the risk. Residual risk should not exceed the
companys appetite for that risk.
16.8 CRANAGE COMPANY

(a) The market risk and liquidity risk in the project are financial risks. If the
company wins the contract, it will need to borrow in order to finance the
construction work and it will be repaid gradually over the course of the
contract, after the construction work has finished. Market risk presumably
refers to the risk of an increase in the market rates of interest, so that
borrowing costs will be higher than expected. Liquidity risk refers to the risk
that the company will run out of liquidity and will not have access to cash
that it needs to settle its liabilities. Liquidity risk would arise from the
possibility that the construction work will cost more than expected, or that
completion of the work will take longer than expected, with the result that
net cash inflows from the project will be less than expected or delayed.
The other risks mentioned by the chairman are all related to CSR issues. In
carrying out major public construction work, there may well be health and
safety concerns and also environmental concerns. Health and safety risk
would be the risk that employees in the construction team or members of
the public might be injured or killed, or their health might be affected, as a
consequence of the construction work. Environmental risk would be
concerned with the possibility that the construction work will cause
unexpected or undesirable damage to the local environment.
Business probity risk is evident from the comments of Willie Walker, who
intends to be dishonest in dealing with the customer after the contract has
been won, in order to maximise revenue. A lack of integrity in business
dealing is unethical, and there is a risk that if a company acts dishonestly,
and the nature of its dishonesty is subsequently discovered, this will have
implications for the business relationship with the customer and the future
of the contract.
Legal risk is linked to the risks of failure by the company to meet expected
standards of performance or conduct, with the result that it might face legal
action for health and safety or environmental issues, or for matters relating
to breach of contract.
If the company wins the contract and becomes involved in a matter related
to health and safety, the environment, dishonesty or a legal dispute, and
the matter becomes public knowledge, its reputation with the public as well
as the customer will be damaged. Reputation risk might therefore exist as
a consequence of other risks. A poor business reputation is likely to affect
the success of the company in winning more contracts of a similar nature in
the future.

If Cranage Company wins the contract, it is recommended that a

management team should be given the responsibility for managing the
contract. The team should be given specific responsibility for internal
control and risk management as it affects the contract work. If he is
concerned about the risk issues, Colin Rowe might ask for a risk report to
the board of directors from the contract management team.
A risk review might be carried out. This should seek to identify the risks in
the project. These might include the risks identified by Colin Rowe. The
risks should then be evaluated and assessed, to establish which are the
most significant and which require control measures. Control measures
should be established and communicated to staff engaged on the contract
work, and there should be regular reviews of the progress of the contract,
including a continual risk review and monitoring of the effectiveness of risk
control measures.
(b) Transparency means making things clear to an outside observer. In the
context of corporate governance, transparency refers to a situation where
investors understand what a company has done and is trying to achieve,
and the risks that it faces, so that they can make rational and well-informed
investment decisions.
Transparency depends on the provision of information by a company about
its affairs to outsiders, particularly shareholders and other investors. Much
of the emphasis of best practice in corporate governance concerns
disclosures that a company should make to its shareholders, such as
disclosures about its financial performance and financial position (in the
financial statements), the remuneration of its directors and the significant
risks that the company faces (e.g. in the business review, for quoted
companies in the EU).
Information asymmetry is virtually the opposite of transparency. It refers to
a situation in which one group of individuals have access to much better
and much more detailed information than other individuals or groups. In
corporate governance, the term is often used to describe the access to
much better information enjoyed by the directors of a company compared
with the shareholders.
When there is significant information asymmetry, it might be possible for
the directors of a company to govern the company in their own interests,
ignoring the interests of the shareholders. An extreme example would be a
director using inside information to buy or sell shares in the company in
order to make a personal profit. Although insider dealing is a criminal
activity, it is made possible by information asymmetry.
Transparency and information asymmetry are therefore important for good
corporate governance for the same basic reason. Good corporate
governance comes from greater transparency, more disclosures by a
company and so less information asymmetry.
(c) The annual external audit is a cornerstone of good corporate governance,
by providing an objective and external check on the way in which the
financial statements of a company have been prepared.
The financial statements are a means by which the directors of a company
are made accountable to the shareholders, and it is therefore important that
the statements should give a true and fair view of the financial position and
performance of the company. The external audit provides some form of

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reassurance to shareholders that the information presented in the financial

statements can be relied on and trusted.
On the other hand it is important for investors to recognise that the external
audit provides reassurance to a certain extent. The audit cannot be certain
to detect any fraud that has occurred, and it cannot provide absolute
assurance that the figures in the financial statements are correct or reliable.
In the context of agency theory, the external audit is an agency cost. It is a
cost that the owners of a company incur in order to obtain reassurance that
the directors are governing the company in the interests of the
shareholders.
The external auditors are also able to provide management with
independent opinions about the effectiveness of the system of internal
control. In carrying out the audit, the auditors need to make a judgement on
the extent to which they are able to rely on the internal financial control
system of the country. By reporting weaknesses in controls to management
and the board of directors the auditors can help the directors to assess the
effectiveness of the internal control system. Reporting on the effectiveness
of internal control is a corporate governance requirement in many
countries.
However the value of the external audit to shareholders can be significantly
reduced by any doubts that arise about the independence of the auditors
from the company and its management. One of the reasons for the collapse
of Enron in the USA in 2002 appears to have been the lack of
independence of its auditors.
16.9 JPX
(a) Risks of the proposed acquisition
Risks that Chemco might incur in acquiring JPX.
The case describes a number of risks that Chemco could become exposed
to if the acquisition was successful. Explicitly, the case highlights a possible
environmental risk (the negative local environmental impact) that may or
may not be eventually valued as a provision (depending on whether or not
it is likely to result in a liability). Other risks are likely to emerge as the
proposed acquisition develops.
Exchange rate risks apply to any business dealing with revenue or capital
flows between two or more currency zones. The case explicitly describes
Chemco and JPX existing in different regions of the world. Whilst exchange
rate volatility can undermine confidence in cash flow projections, it should
also be borne in mind that medium term increases or decreases in
exchange values can materially affect the returns on an investment (in this
case, Chemcos investment in JPX).
There is some market risk in Chemcos valuation of JPX stock. This could
be a substantial risk because of JPXs relatively recent flotation where the
market price of JPX may not have yet found its intrinsic level. In addition, it
is not certain that Chemco has full knowledge of the fair price to pay for
each JPX share given the issues of dealing across national borders and in
valuing stock in JPXs country.
All mergers and acquisitions (integrations) are exposed to synergy risks.
Whilst it is expected and hoped that every merger or acquisition will result
in synergies (perhaps from scale economies as the case mentions), in

practice, many integrations fail to realise any. In extreme cases, the costs
arising from integration can threaten the very survival of the companies
involved.
Finally, there are risks associated with the bringing-together of the two
board structures. Specifically, structural and cultural changes will be
required at JPX to bring it in line with Chemcos. The creation of a unitary
board and the increased involvement of NEDs and departmental heads
may be problematic, for example, Chemcos board is likely to insist on such
changes post-acquisition.
Assessment of risk
The assessment of the risk exposure of any organisation has five
components. Firstly, the identity (nature and extent) of the risks facing the
company should be identified (such as considering the risks involved in
acquiring JPX ). This may involve consulting with relevant senior managers,
consultants and other stakeholders.
Second, the company should decide on the categories of risk that are
regarded as acceptable for the company to bear. Of course any decision to
discontinue exposure to a given risk will have implications for the activities
of the company and this cost will need to be considered against the benefit
of the reduced risk.
Third, the assessment of risk should quantify, as far as possible, the
likelihood (probability) of the identified risks materialising. Risks with a high
probability of occurring will attract higher levels of management attention
than those with lower probabilities.
Fourth, an assessment of risk will entail an examination of the companys
ability to reduce the impact on the business of risks that do materialise.
Consultation with affected parties (e.g. departmental heads, stakeholders,
etc.) is likely to be beneficial, as information on minimising negative impact
may sometimes be a matter of technical detail.
Fifth and finally, risk assessment involves an understanding of the costs of
operating particular controls to review and manage the related risks. These
costs will include information gathering costs, management overhead,
external consultancy where appropriate, etc.
(b) Environmental reporting.
Memorandum
From: Professional Accountant
To: Leena Sharif
Date: DD/MM/YYYY
Re: Environmental issues at Chemco and JPX
1. Introduction
I have been asked to write to you on two matters of potential
importance to Chemco in respect of environmental issues. The first of
these is to consider the meaning of the term, environmental footprint
and the second is to briefly review the arguments for inviting JPX
(should the acquisition proceed) to introduce environmental reporting.

Answers
2. Environmental footprint
Explanation of environmental footprint
The use of the term footprint with regard to the environment is
intended to convey a meaning similar to its use in everyday language.
In the same way that humans and animals leave physical footprints
that show where they have been, so organisations such as Chemco
leave evidence of their operations in the environment. They operate
at a net cost to the environment. The environmental footprint is an
attempt to evaluate the size of Chemcos impact on the environment
in three respects.
Firstly, concerning the companys resource consumption where
resources are defined in terms of inputs such as energy, feedstock,
water, land use, etc.
Second, concerning any harm to the environment brought about by
pollution emissions. These include emissions of carbon and other
chemicals, local emissions, spillages, etc. It is likely that as a
chemical manufacturer, both of these impacts will be larger for
Chemco than for some other types of business.
Thirdly, the environmental footprint includes a measurement of the
resource consumption and pollution emissions in terms of harm to the
environment in either qualitative, quantitative or replacement terms.
3. Environmental reporting at JPX.
Arguments for environmental reporting at JPX
There are number of arguments for environmental reporting in
general and others that may be specifically relevant to JPX. In
general terms and firstly, Im sure as company secretary you will
recognise the importance of observing the corporate governance and
reporting principles of transparency, openness, responsibility and
fairness wherever possible. We should invite JPX to adopt these
values should the acquisition proceed. Any deliberate concealment
would clearly be counter to these principles and so more rather than
less reporting is always beneficial.
Second, it is important to present a balanced and understandable
assessment of the companys position and prospects to external
stakeholders.
Third, it is important that JPX recognises the existence and size of its
environment footprint, and reporting is a useful means if doing this.
Fourth, and specifically with regard to JPX and other companies with
a substantial potential environmental footprint, there is a need to
explain environmental strategy to investors and other interested
stakeholders (e.g. Chemco). Finally, there is a need to explain in
more detail the negative local environmental impact and an
environmental report would be an ideal place for such an explanation.
Summary:
As JPXs environmental footprint is potentially quite large, it is important
that Chemco ensures as far as possible, that any such footprint left by JPX
is known and measured. Additionally, in the interests of transparency,
openness, responsibility and fairness, it is important that it is also fully
reported upon for the information of both investors and other interested
stakeholders.

16.10 PINGO PLC

Key answer tips
There are some factors that affect the risk of all projects the aim of this
question is to apply those factors to three different projects. As you would expect,
the risks are different with each project, so part of the question is to ensure that
you can evaluate the risks sufficiently well.
The three risk categories that need to be discussed include the size of the project
there are two more to guess. Part (a) of the question simply asks for an
explanation of these factors but remember to show how the different factors fit
together to provide an assessment of overall project risk.
Part (b) is the application part of this question. So, using the three factors
outlined in part (a), you can now state how risky each project is. Remember to
provide reasons for your assessment based on the scenario information.
(a) Systems differ considerably on key factors such as size, project structure
and technology being used. These factors will combine to provide a risk
assessment on how likely it is for a project to fail.
Project size
In general terms, the larger the size of the project in terms of:
monetary expenditure
project duration
number of staff involved, and
number of business units affected.
The more likely it is to fail. Small projects, involving small amounts of
money and affecting relatively few people therefore have a much higher
chance of success than large projects, spending considerable sums of
money, employing many staff and affecting all business units.
The main issue is that the larger the project, the more complex it is, and so
the more things that can go wrong. Smaller projects are literally more
controllable because the entire project can easily be monitored by relatively
few people.
Project structure
Some projects have a very clear structure. That is, users know exactly what
they want, and the system can be planned with outputs and processes
clearly defined. A very clear project plan is therefore available and can be
followed easily as the project progresses, and so the likelihood of reaching
the end of project with a successful system implementation is high.
Projects that have unclear deliverables, or where users change their minds
about what is required, are more likely to fail because it is difficult to
complete a project where the final outcomes keep changing.
Experience with technology
IT technology is continually changing and developing, which leads to the
need for continued training and development of IT staff. However, where
training is lacking or the technology being used is new and unfamiliar, then
there is a higher risk of project failure. In these situations there is a higher
risk of technical problems that cannot be solved, which will result in the
failure of the project.

Answers
These three factors can be combined in a table to show the overall degree
of risk associated with a project
Project Size Project Structure Technology Level Degree of Risk
Large High Low Low
Small High Low Very Low
Large High High Medium
Small High High Medium-Low
Large Low Low Medium-High
Small Low Low Very Low
Large Low High Very High
Small Low High High
(b) Comment on individual projects

(i) Salary system
This project appears to be large presumably all staff within the
organisation need to be paid and it will affect all business units.
However, the project does not appear to be complex, which will limit
the amount of risk.
The project structure also appears to be clear; the Board is quite clear
about what is required and there is a straightforward method of
obtaining the software. The risk of errors in the software will be low as
it is a third party system and will have been tested prior to
implementation. Given that the package provides the necessary
functionality, then it is unlikely to require any amendment, again
decreasing the amount of risk.
No new technology is required to implement the system, so risk in this
area is also low.
Risk assessment is low in all three categories, so overall
implementation risk is low.
(ii) Inventory system
Although the overall project size is unclear, it may be large in terms of
expenditure, as the whole system needs to be replaced. If all
business units use the system then the change is pervasive to the
whole organisation. The duration is limited, although this may not
decrease the risk, as noted below.
Although the project has to be implemented relatively quickly, there
does appear to be appropriate planning taking place; there are
already plans in place, which indicate a high level of project structure.
There appears to be some risk with technology, as the system is
moving from a DOS to a Windows system. File conversion will need
to be checked in detail to ensure that no errors occur and that the
new Windows system can provide the required reports.
Overall, the risk appears to be medium; Large project size, High
project structure and high technology level.

(iii) Extranet
The Extranet project appears to be very speculative. The size of the
project is unclear, although it may be relatively large given that it will
involve linking internal databases with some form of Internet
provision.
There is currently no defined project structure. The project manager
has been appointed, but without any clear remit as to what to report
or when. At present, there is no project plan or clear idea of
deliverables.
The Extranet will mean using quite new technology, in a field that the
organisation has very little experience in.
Overall risk is therefore high; medium to high project size, lack of
structure and high use of new technology.

Answers
CHAPTER 17 CONTROLLING RISK

17.1 RISK MANAGEMENT APPROACH
(a) Risk reduction. Risk reduction involves the application of control
measures. A risk that exists before the control measures are applied is
reduced to a residual risk. The aim of risk reduction should be to restrict
residual risks to an acceptable level. Internal controls reduce the
operational risks (risks from human error, fraud, technological failures, and
so on). Financial risks can be reduced by means of forward contracts or
derivative instruments: hedging a financial risk reduces the residual risk.
(b) Risk transfer. Risk transfer involves moving the risk to another person.
Usually, a payment has to be made for the risk transfer. The most common
form of risk transfer is probably insurance. By paying the premium for an
insurance agreement, a person can transfer all or most of the risk to an
insurance company.
(c) Risk avoidance. Risk avoidance means having no exposure at all to a risk.
In business, it is impossible to invest and operate without having some risk
exposures. Avoiding risk therefore means not investing, or withdrawing
from an investment.
(d) Risk sharing. With risk sharing, the risk is divided between two or more
people/organisations, who are all exposed to the risk of losses or the ability
to benefit from unexpected gains. Joint ventures or partnerships are
examples.
17.2 RISK MANAGEMENT REVIEW

(a) (Tutorial note: There is no single correct answer to this question. The list
of questions below is indicative of the questions that Robert Lam should
ask.)
Questions:
1 Does the company have a system for identifying risks (and if so, what
is it)?
2 Does the company have a system for assessing risks and prioritising
risks?
3 Does the company actively manage its risks?
4 Has the board of directors communicated to management what levels
of risk are acceptable? (Or: Has the board formulated and
communicated a clear policy on risk and risk management?)
5 Has the board of directors identified the limits of its risk appetite?
6 Should certain risks be taken at all, or should they be avoided? (Or:
Should the exposure to certain risks be increased/reduced?)
7 Do independent non-executive directors occasionally select and
challenge operational risk reports and investment decisions by
management?

17.3 RISK MODEL

A risk model is usually a mathematical model. The model contains a number of
variables, and the relationships between the variables are expressed in the form
of mathematical formulae.
Models vary in complexity, and range from simple models with a small number of
variables, to much larger models with a large number of different variables and
complex relationships between the variables.
The variables in a model are either input variables or output variables. Input
variables are items whose value is either known or estimated. Output variables
are items whose value depends on the value of the input variables.
Mathematical models are used to predict what will happen, or what might
happen. By giving values to all the input variables in the model, the model user
can calculate values for the output variables. For example, a simple model for the
total costs of production might be y = a + bx. By giving values to fixed costs, the
variable cost per unit and the number of units (a, b and x respectively) we can
calculate the total costs, y.
With risk models, there is some uncertainty about the value of the input variables
in the model, or about the mathematical relationship between the input variables.
This means that there is also some uncertainty about the value of the output
variables. By altering the value of the input variables, different values for output
variables are obtained.
Mathematical models can therefore be used to prepare forecasts, with some
statistical analysis of the range of different possible outcomes. Models can also
be used to assess risk, also be measuring and analysing different possible
results under differing circumstances. The risk in any situation can often be
quantified mathematically, in the form of a probability distribution.
Risk models can, in some cases, be used to control risk levels. For example in
banking Value at Risk models are used to assess credit risk, and measure the
possibilities of losses of differing amounts from bad debts. Value at Risk models
can be used to control the total credit risk, by restricting the total credit that a
bank gives to customers. The total bad debt risk can be kept within acceptable
limits at a specified level of probability.
Risk models can also be used for stress testing. The purpose of stress testing is
to predict how an operation or activity will perform under extreme conditions. If
the model predicts that the operation or activity will not function adequately under
extreme conditions, extra risk control measures can be planned and introduced,
to make the operation or activity more robust. For example, a company
operating train services might use a risk model for stress testing, by predicting
what might happen if the total volume of passenger traffic on the trains were to
increase by, say, 20%.
In summary, mathematical risk models can be used to obtain quantified
measurements of risk.
17.4 RISK CULTURE

Embedding means that risk awareness and risk control procedures and
management practices should be an integral part of operational and
management systems within an organisation.

Answers
It can be distinguished from risk control that is applied occasionally by an

external agency. For example, the annual audit of a companys financial
statements by the external auditors is a form of risk monitoring, but it is not
embedded within the companys own systems. It is a risk control measure applied
from outside the company. Similarly, inspections by external agencies, such as
government inspectors, are not embedded risk control measures.
Controls that are applied internally might not be embedded when they are
carried out occasionally as a special initiative. For example, a company might
carry out a risk review, but if this is a one-off exercise it is not an embedded
feature of the risk management system.
Risk (or risk awareness) should be embedded in a companys culture. This
means that an awareness and understanding of risk should be a part of the
thinking of management and other employees. Decision-makers within a
company should consider the risks when they make their decisions. Employees
should be conscious of the need to control risks and apply risk controls in the
work that they do.
Risk (or risk awareness) should also be embedded in a companys values. This
means that the company should recognise the importance of risk management
when setting targets for performance and when judging actual performance.
Reward systems should not be based on profit maximisation: the payment of
rewards should also be linked to successful risk management. A frequent
criticism investment banks is that traders are rewarded for maximising profits on
trading, without regard for the risks they take: as a result, risk management might
not be given the status and recognition that it ought to have.
Risk should also be embedded within a companys procedures. There should be
suitable internal controls within operating procedures, and employees should
apply those controls at all times. For example, safety procedures should be
taught to all employees and properly carried out at all times.
17.5 RISK MANAGEMENT AND AUDIT

a) A risk managers role involves providing information, assistance and advice
in order to improve risk awareness within the entity and encourage the adoption
of sound risk management practice. Typical responsibilities might include:
Helping with the identification of risks
Establishing tools to help with the identification of risks
Establishing modelling methods for the assessment and measurement of
risks
Collecting risk incident reports (for example, health and safety incident
reports)
Assisting heads of departments and other line managers in the review of
reports by the internal auditors
Preparing regular risk management reports for senior managers or risk
committees
Monitoring best practice in risk management and encouraging the
adoption of best practice within the entity.
b) The four stages in a risk audit are:
Stage 1: Identification. The first step in a risk audit should be to identify
what the risks are in a particular situation, strategy, procedure or system.

Risks change continually in nature. Existing risks may disappear, and new
risks may emerge. It is therefore essential to identify what the current risks
are, especially for companies that operate in a volatile business
environment.
Stage 2: Assessment. When the risks have been identified, the next step
should be to assess them. The probability of an adverse event or outcome,
and the impact of an adverse event should be measured. A risk can be
assessed by its expected loss. The expected loss = Probability x Impact.
Stage 3: Review. The auditor should look at the controls that are in place
to manage the risk in the event that an adverse outcome happens.
Management may have taken measures to transfer the risk (for example, to
insure certain risks) or to reduce the risks by introducing control systems
and monitoring systems. The controls for each material identified risk
should be audited.
Stage 4: Report. The risk audit should lead to a report to the board of
directors or to management, depending on who commissioned the audit.
The advantage of having risk audits performed by internal auditors is that the
individuals who carry out the audit should be very familiar with the company and
its systems, procedures and culture. As a result:
The auditor begins with an understanding of relevant technical issues, how
the business operates and the legal and regulatory framework and control
systems. He should therefore be capable of performing highly context-
specific risk audits, at a level of detail that an external auditor may not be
able to achieve.
The audit report is likely to be written in a language and using terms that
the companys management understand, and so may be easier to
comprehend than a report written by an external auditor.

Answers
CHAPTER 18 BUSINESS AND PROFESSIONAL ETHICS

18.1 CODE OF ETHICS
Code of Ethics provides a guideline to the moral principles or values by which
an organization conducts its business with respect to what is right or wrong.
The Code of Ethics applies both to the organization as well as its employees in
all their business dealings.
The advantages of adopting a formal code of ethics are:
Provides an explicit guidance to employees so that they know what is
expected from them in terms of ethical behaviour.
Enhances the organisations reputation and inspires public confidence.
Creates an awareness of the organisations expectations of proper
conduct among all the stakeholders, including the management.
Promotes a culture of excellence by demonstrating the organisations
commitment to ethical behaviour.
18.2 DENTAL EQUIPMENTS LTD

(a) DEL should adopt the following policy measures to eliminate the unethical
practices followed by the sales representatives:
(i) Create a written Company Code of Ethics and circulate it to each
member of the sales department. This would eliminate the
ambiguities and help the employees to differentiate between what is
considered to be acceptable behaviour and what is unethical
behaviour.
(ii) Issue clear and specific instructions, requiring adherence to the
norms of ethical behaviour. These instructions would be deterrent for
the sales representatives and dissuade them from engaging in
unethical practices.
(iii) The consequences of indulging in unethical behaviour should be
stated clearly in the Code of Ethics.
(iv) Sales Representatives who are unable to achieve their allocated
targets fully should also be rewarded on an appropriate basis.
(v) DEL should sponsor and organise seminars and workshops on Ethics
to emphasise the importance of ethical behaviour.
(b) It would be advantageous to establish branch operations in a foreign
country instead of an overseas subsidiary company in the following
situations:
(i) If the foreign business is not expected to be profitable in the initial
years and therefore the losses of the subsidiary company can have a
negative effect on the image of the MNC.
(ii) If the legal and accounting formalities of the branch operations are
more simple vis--vis those involved in a subsidiary company.
(iii) If the MNC does not intend to have a long term presence in the
foreign country, it would prefer to establish branch operations.
(iv) If the amount of investment involved in the foreign country is of a
nominal amount and it may be advisable to set up branch operations
instead of a subsidiary company.
(v) If it is advisable to have a low operating profile to achieve the
business objectives.

18.3 FUNDAMENTAL PRINCIPLE

Integrity means honesty. In business, it means straight dealing. If you deal with
a person of integrity, you know that he or she will tell you the truth and will not try
to mislead you.
A person of integrity will behave in accordance with a set of ethical values, and
so will always behave in an ethical way.
Integrity is important because it creates trust. Trust is an essential requirement
for the creation and maintenance of constructive relationships.
It is important in corporate governance. Directors of companies should be
individuals of integrity. If they are, the shareholders will believe what the directors
tell them and will trust them to govern the company in the interests of the
shareholders and not in the self-interest of the directors themselves.
Integrity is also important for professional accountants, and is one of the
fundamental ethical values that accountants should demonstrate at all times. If
accountants are able to show integrity, they will have the trust of their employer
or clients and also the trust of the general public. (This is important, in view of the
responsibility of accountants to consider the public interest.)
The behaviour of directors and professional accountants can be regulated to
some extent, by rules and detailed codes of conduct. However, there are many
situations that are not covered by rules or detailed codes. In these situations,
directors or accountants with integrity can be trusted to do the right thing and act
in an ethical way.
18.4 PUBLIC INTEREST

The public interest is the collective well-being of society or the community of
people and institutions in which an individual lives and works.
Showing a concern for the public interest means recognizing responsibilities to
the public. For a professional accountant, the public includes employers, clients,
government, investors, employees, creditors, customers, the business and
financial community and all people who rely on the objectivity and integrity of
professional accountants to maintain the orderly functioning of business and
commerce.
Professional accountants are required to show a concern for the public interest in
the work that they do. They should put the public interest before their
responsibilities to their employer or clients, for example when the employer or a
client is acting illegally.
Accountants also have an obligation to the public in their everyday life, because
they help to create public trust in business.
The public has a right to expect that:
auditors will try to ensure the reliability of financial statements that are
issued by companies
financial managers will help to ensure the efficient and effective use of
resources by the companies or other entities they work for
tax experts will ensure a fair application of the tax rules
accountants will give competent business advice to management.

Answers
18.5 BUSINESS AND PROFESSIONAL ETHICS

(a) A business code of ethics is developed for a company and is a statement of
the ethical stance of the company. It is also a statement by the company
about how it expects its employees to behave, in order to uphold the ethical
values of the company.
A professional code of ethics for accountants is for all individual
professional accountants, and is a statement of how they are expected to
behave as individuals. It includes a requirement that accountants should
consider the public interest.
(b) An accountant might face an ethical dilemma in the following situations.
(1) The accountant is under pressure from a senior manager to agree
with the managers point of view and provide formal support, even
though the accountant does not agree.
(2) The accountant is expected to support a decision taken by
management, which might also be in the accountants personal
interests, even though the accountant knows the decision to be
wrong. (For example, the accountant might be expected to keep quiet
about an illegal activity by the company.)
(3) The accountant is asked to do something that is contrary to an
accounting standard, or other professional or technical standard, in
order to present information in a more favourable way.
(4) The accountant is asked to keep quiet about a mistake made by a
boss. The accountant might feel obliged to agree, out of loyalty to the
boss.
(5) The accountant misleads his boss of his client about this technical
expertise and knowledge, in order to be given some work.
18.6 SIGNIFICANCE OF BUSINESS ETHICS

Business Ethics are the moral principles of conduct applied in the commercial
world.
Business ethics provide guidelines to individuals and organizations to determine
whether a particular action is right or wrong. Good business ethics are essential
for good strategic management as issues of ethics permeate in all areas of
strategy formulation, implementation and evaluation.
An ethical approach has become increasingly necessary both for corporate
success and a positive corporate image. The rapid expansion of information
technology has created awareness and enhanced the importance of ethical
behaviour in business all over the world. Pressures from employees, consumers
and other stakeholders for adherence to ethical and responsible business
practices have led many organizations to make public commitment of their ethical
business standards.
An increasing number of organizations now adopt concepts of personal and
corporate accountability in all aspects of their business conduct. Misleading
advertisements, poor employee health and safety procedures, causing harm to
the natural environment, poor product or service safety standards, insider trading
and discrimination in dealing with employees are considered to be violation of
acceptable ethical behaviour.

CHAPTER 19 CONFLICTS OF INTEREST AND ETHICAL CONFLICT

RESOLUTION
19.1 WORKSHOP
(1) The first step in assessing the situation is to decide whether an ethical
issue does exist. The partners have agreed a valuation for the business,
and an amount that the remaining partner will pay the retiring partner to
take over the entire business. There is a concern that the valuation of the
balance sheet might have been based on a balance sheet valuation of
assets, and that the value of the workshop might not have been brought to
the attention of the retiring partner. If these are the actual facts, the retiring
partner will be paid less than his or her fair share of the business on
retirement.
If possible, as much information about the valuation of the business should
be obtained, without (yet) alerting the partners to your concerns. There may
be a written agreement between the partners about what should happen on
the retirement of one of the partners. For example, there may be a written
partnership agreement in which a process is specified for valuing the
business on the retirement of a partner. If the partners have reached their
agreed valuation of the business in a fair and open way, there is no ethical
problem for the accountant.
If there are doubts about whether the valuation of the business has been
fair, there is an ethical issue to resolve, because one of the clients could be
treated unfairly by the other.
(2) The next step is to assess the threats to the accountants compliance with
the fundamental ethical principles. The two clients could have a conflict of
interests. This raises threats to the accountants integrity (objectivity) and
ability to treat the affairs of each client with confidentiality.
Integrity is threatened because at some stage, the accountant might have
to take sides, and support the interests of one client against the interests of
the other. Confidentiality is threatened because by raising concerns with
one client, the accountant would be breaching confidentiality for the other
client.
The threats would seem to be sufficiently significant to make the
accountant consider whether additional safeguards could be introduced to
eliminate the risk.
(3) The next step is therefore to consider safeguards. In a large accounting
practice, it might be possible to appoint another senior member of staff to
take over dealing with the affairs of one of the client partners. Since the
accountant here is a sole practitioner, this is not possible in this situation.
There are no other obvious safeguards that can be introduced, and the
accountant is therefore faced with a significant threat to compliance with
the fundamental ethical principles. He should not allow this to happen.
(4) A solution to the problem has to be found. The most suitable solution in this
case would be to arrange a meeting with both partners, where the
accountant should inform them that he is unable to continue providing
professional services to both of them.
At the meeting, the partners might agree that the accountant should
continue to provide a service to one of them, but the accountant should not
take sides and indicate any preference for one client.

Answers
19.2 MARTHA
(a) Martha did not learn about the error in the figures for the board until after
they had been submitted. The consequence of the error could have been
very serious, and the board might have taken a big investment decision
based on misleading and incorrect information.
There is a threat to the integrity of Jerry and the members of his team,
including Martha, when information is provided that is known to be
materially incorrect.
Martha was probably correct to wait until the board made its investment
decision. Since the board decided not to invest, the failure of Jerry to report
the corrected figures to the board did not have any immediate
consequence.
However, Martha was also correct to recognise that a similar problem might
happen again in the future, and she looked for a suitable safeguard. She
thought that she had found a safeguard by obtaining agreement from Jerry
to involve his team more closely in the future in preparing and checking
figures.
In conclusion, the action by Martha in this first instance was probably
appropriate, and she complied with the fundamental ethical principles (even
though Jerry did not).
However, she should maintain documentary evidence or a documentary
record of the incident, in case she needs to raise the matter again at some
time in the future.
(b) The second incident showed to Martha that the safeguard she agreed with
Jerry earlier had not worked. Jerry submitted figures to Bill that were
presumably not checked by anyone else in Jerrys team. However, Martha
would need to check this point: errors in checking Jerrys figures could have
been made by someone else in the team.
Another ethical issue arises however, because Jerry has asked Martha not
to correct all the errors she found, only those that Bill knows about. If
Martha agrees to do what Jerry has asked, she will be in breach of the
fundamental principle of objectivity. Accountants should not be involved in
the provision of information that is materially incorrect or misleading.
There is pressure from Jerry to make her do what he wants, possibly by
asking her to act out of a sense of loyalty to him (a familiarity threat) or
because Martha feels intimidated by the possible consequences of arguing
with her boss and refusing to comply with his instructions.
Martha is in a very difficult position. She must comply with the fundamental
ethical principles, but in doing so she will inevitably cause problems in her
working relationship with Jerry.
I recommend that Martha should take the following action.
(1) She should speak to Jerry about her concerns, and explain that she
cannot agree to do what he has asked.
(2) She should discuss the failure of their previous agreement and her
concern that there could be more similar situations in the future where
Jerry prepares incorrect information and asks his staff to cover up the
errors.

(3) She should explain that she will provide corrected figures to Bill with
corrections to all the errors that she has found. She will draw the
additional errors to the attention of Bill.
(4) She should tell Jerry that she is concerned with his unprofessional
conduct, and that she cannot continue to work for him in the future.
She will therefore need to consider her position.
This leaves a problem unresolved. If Martha asks for a transfer to another
department, she will be leaving Jerry to continue to do what he has done in
the past, preparing figures without due care and covering up any errors.
This is likely to be a serious situation for the company. Martha might
therefore decide that she needs to inform Bill about the problems she has
experienced. She should inform him about Jerrys reluctance to admit to his
mistakes (and she could explain the consequences by giving Bill another
set of figures containing corrections only to the errors that he had found, so
that he can compare them with Marthas own corrected figures). She
should also mention the earlier incident about the errors in the board
papers and Jerrys similar refusal on that occasion to admit to the errors.
Bill can then make a decision about what action is appropriate.
19.3 OBJECTIVITY
The problem here is that by offering to sell a necklace to Richard at a discount,
the finance director might be trying to influence Richard by obtaining his goodwill.
The risk is to Richards objectivity, which is a fundamental ethical concept.
Richard does not have to reject the offer from the finance director without
consideration. He can begin by establishing some basic facts.
(1) He should decide whether he would he want to buy any of the necklaces. If
he didnt, he could politely refuse the offer from the finance director.
(2) If he is interested in buying a necklace, he should ask what the price would
be both without the discount and with the discount.
(3) He should ask whether the company normally offers discounts, and if so
what a normal commercial discount to a customer would be.
He could then tell the finance director that he is grateful for the offer and is
interested in buying a necklace, but he must first clear the matter with his audit
manager. He can explain that this is a professional requirement.
He can tell the audit manager about the offer from the finance director. If the size
of the discount is one that is normally offered to other customers of the company,
or if it is insignificant in amount, they might agree that Richard can accept the
offer without any threat to his objectivity. Otherwise he should politely thank the
finance director for the offer, but say no.
19.4 CODE OF PROFESSIONAL ETHICS

A rules-based code of ethics is one in which detailed rules are specified about
the way in which professional accountants must behave or act in particular
circumstances.
In practice, there are many different situations, with differing circumstances,
where accountants might have an ethical dilemma. It would be difficult to foresee
every type of situation and specify the exact rule for each. The appropriate
resolution of an ethical problem might also vary between countries, according to
the differing cultures and ethical outlook of each country.

Answers
For this reason, except where particular behaviour is required from accountants
by the law (for example, with regard to reporting suspicions of money laundering
activities by a client), accountants are required to act in accordance with a
principles-based code of ethics.
The code of ethics for accountants requires compliance with five fundamental
ethical principles: integrity, objectivity, professional competence and due care,
confidentiality and professional behaviour and care.
19.5 VENAL FOODS

(a) A professional accountant has the following responsibilities to his or her
employer:
To act with integrity and diligence and with the highest standard of
care, in all situations.
As far as possible, to observe the confidentiality of information
obtained during the course of work. This requirement to maintain
confidentiality applies even when the accountant has left the job and
no longer works for the employer.
To act in the interests of the shareholders as far as possible.
To show loyalty to the employer, although only within the limits of
what is legal and ethically proper.
(b) As a professional, an accountant has a responsibility to comply with
additional ethical requirements:
The accountant must comply with the law.
The accountant must comply with any relevant professional codes
that apply.
In the absence of any specific codes, the accountant must comply
with the fundamental ethical principles (of integrity, objectivity,
professional competence and due care, and so on).
Crucially, the professional accountant must also act in the public
interest, even if this means in an extreme case reporting an employer
to the authorities for a breach of the law or other regulations.
(c) Even though the problem in this case does not relate to accountancy and
finance, Ben cannot ignore the problem. The companys management
appear to be breaking the law on food health and safety, and could be
putting the public health at risk.
He must decide what the most suitable course of action is. He should try to
obtain evidence of the law-breaking. If he cannot obtain documentary
evidence, he should make a record of all relevant conversations and
actions.
He should report his concern. Senior management are involved in the
crime, and he should therefore begin by reporting his concern outside the
normal hierarchical channels. He might report the problem to the company
chairman, for example, or another director.
It should then be the responsibility of the chairman or board of directors to
take action.
If no action is taken internally, Ben Meakin will probably be obliged to report
to an external agency, such as a food standards agency or a public health
agency. However, this would be an extreme measure, and internal
procedures for dealing with the problem should be tried first.

CHAPTER 20 CORPORATE SOCIAL RESPONSIBILITY AND

SUSTAINABILITY
20.1 PROGRESSIVE CORPORATE SOCIAL RESPONSIBILITY
(a) Corporate Social Responsibility involves an organizations obligation to
provide benefits to society in ways that protect and improve the welfare of
the society, along with pursuance of the organizations own business
interests.
(b) The major concerns which prevent organizations from adopting and
implementing comprehensive policies of CSR are:
(i) Concerns that they may adopt a comprehensive CSR policy while
their competitors may not do so with the result that they may incur
costs which may place them at a competitive disadvantage.
(ii) Organizations may not feel a sense of commitment and urgency to
address to the various issues which are of a societal nature.
(iii) There are no accepted standards on CSR issues.
(iv) At times it may be difficult to identify the stakeholders and the
audience for the CSR reports which may be ambiguous and could
undermine the quality of the reports.
(v) Belief that efforts of the traditional philanthropists are sufficient to take
care of the social needs of the society.
(vi) Reporting on the entire scope of a companys impact upon the society
and the environment is a complex exercise which is beyond an
individual organizations capabilities and scope of activities.
20.2 EXCEL CHEMICALS

The management of ECL should take the following Safety Policy measures to
minimise the risks of accidents in the plant for the manufacture of industrial
chemicals:
(i) Involvement and active supervision by the top management and
participation of the employees in introducing effective safety policies in the
entire premises.
(ii) Creation of a Safety Committee to review the safety measures and monitor
the implementation of the safety rules and procedures periodically to create
a safe and secure working environment.
(iii) Preparation of Safety Rules and Instruction Manuals for strict compliance
by employees at all levels.
(iv) Education and training of the workers on a continuous basis and
dissemination of information by posting of safety charts, posters and
installation of safety equipment at all sensitive areas in the premises.
(v) Creation of an environment where the equipment and machines which are
properly maintained and the workers are provided protective uniforms.
(vi) Installation of proper warning/alarm systems and conduct of regular safety
drills and exercises.
(vii) Adoption of a policy which ensures that the workers are not required to
work for very long hours which may adversely affect their concentration and
result in performance lapses.

Answers
20.3 AUSTERITY AND CSR

(a) Stringent Cost Reduction and Austerity policies may be in conflict with the
interests of the stakeholders in the following situations:
(i) Customers
the products may be of an inferior quality and perform
unsatisfactorily
the products may have a very limited useful life
sub-standard quality of raw material inputs and packaging may
be harmful for the health of the customers
(ii) Employees
working conditions may not be conducive for the health of the
workers
poor maintenance of machinery and equipment may cause
injuries and accidents
inadequate compensation may result in financial difficulties for
the workers
(iii) Society as a whole
cause pollution and create environmental hazard
lack of interest in charities, sports and community activities
impose social cost on the society by making improper use of
public assets
(b) Corporate Social Responsibility is a form of voluntary business approach
that a business firm pursues to meet or exceed the expectations of its
stakeholders by adopting social, ethical and environmental measures. The
goal of CSR is to make a positive impact through its activities on the
environment as well as all its stakeholders.
(c) The following important factors should be included in developing an
effective Accident Prevention and Reporting System for a company
involved in heavy mechanical and engineering operations:
(i) All accidents should be reported on Accident Reporting Forms and
proper records should be maintained of accidents resulting in death
and major injuries.
(ii) Identification of particularly more risky activities and adopting special
precautionary measures such as installation of safety grills to prevent
accidents.
(iii) Periodic training of employees for compliance with the safety rules
and procedures so that they are fully aware of the accident hazards
while performing their duties.
(iv) Regular maintenance of plant and machinery to ensure that all the
parts and components are repaired/ replaced promptly so that they do
not cause injuries to the workers due to malfunction or breakdown of
the equipment.
(v) Periodical review of the safety conditions should be carried out by an
independent person.

(vi) Statistical trends of recurring accidents must be monitored closely to

identify and examine the need for introduction of special measures.
(vii) Procedures for reporting near-misses should be laid down:
anonymously, if necessary to encourage timely corrective actions and
openness in reporting of such incidents.
20.4 ENVIRONMENTAL FOOTPRINT

An environmental footprint is a term used to mean the mark that has been left
behind on the environment, usually by social and economic activities. All
economic activity has an effect on the environment, and so leaves a footprint
after it has occurred.
A company might report on its environmental footprint by providing information
about three things:
(1) The quantities of natural resources it has used, and (in some cases) the
quantity of land that it uses for its business purposes. An environmental
report may indicate the quantities of natural resources consumed where
these are important renewable resources (such as timber and fish stocks)
or where they are valuable non-renewable resources (such as mineral
deposits, oil and natural gas).
(2) The amount of pollution or emissions created by its activities. These could
be emissions into the air or into the sea, lakes and rivers which pollute the
air or water. They might also be emissions that contaminate land.
(3) Another aspect of the environmental footprint is the effect that the use of
natural resources and the creation of pollution have on the environment. In
addition to quantifying resources consumed and pollution created, there
should be an assessment (in qualitative or quantitative terms) of how the
environment has been affected. For example a company that uses large
amounts of timber might report on the amount of timber it has used, and
also specify the amount of deforestation (allowing for re-planting of new
trees) that this has created in different parts of the world.
20.5 SUSTAINABILITY REPORTING

(a) Sustainability refers to the ability of a company to achieve a sustainable
business. Sustainable development has been defined as business
development that meets the needs of the present without compromising the
ability of future generations to meet their own needs. An important aspect
of sustainable development is the effect of business on the environment.
Companies meet the needs of present-day customers by using resources.
When these resources are non-renewable, or when the rate of use of the
resources exceeds the rate of renewal, current business activity obviously
reduces the ability of future generations to meet their needs.
Another definition of sustainability, which is possibly easier for companies
to accommodate, is expressed in terms of value creation. Value creation is
measured in three dimensions: economic, social and environmental.
Sustainability could be described as creating more value in these three
dimensions than the cost of the resources consumed (economic and
environmental).
A sustainability report typically provides performance measurement in three
dimensions: economic, social and environmental. This is called triple
bottom line reporting, which is advocated by organisations such as the
Global Research Initiative (GRI).

Answers
(b) Users of sustainability reports should have a right to believe that they can
trust and accept the information in sustainability reports.
When a sustainability report presents measures of performance as a triple
bottom line, the economic performance can be verified from information in
the published financial statements. However, there is no way in which the
audit of financial statements can provide verification of performance
measures relating to social and environmental performance.
Unless the published social and environmental information can be formally
verified, there is no way of assessing whether the company is telling the
truth or not. The claims that a company makes could be misleading, or
even totally wrong.
Verification of sustainability report information can be provided by an
environmental audit, provided that the audit is conducted by independent
experts. Specialist firms have been established to provide environmental
audits. The major audit firms have also established environmental audit
groups within their firm.
(c) Social and environmental reports might provide quantifiable or qualitative
information about the effects that a company has had on society and the
environment. They do not necessarily discuss social and environmental
strategy concerns or even social and environmental strategy although
they might.
Social and environmental risk reports are reports about the social and
environmental risks facing a company and how these have been managed.
In the UK for example quoted companies are required to include a section
on social and environmental risks in their annual business report to
shareholders.
20.6 SOCIALLY RESPONSIBLE INVESTMENT

(a) SRI is an approach to investing that takes social and environmental issues
into consideration as well as the profit motive. The term ethical investment
is often used instead of SRI. Socially responsible investment is investment
that ought to be undertaken by a responsible society. It combines the
financial objectives of investors with a commitment to social concerns such
as social justice, economic development and a healthy environment.
For socially responsible investors, there is usually a subjective element to
investment choices: for example in deciding whether investing in a
manufacturer of weapons can ever be ethical and acceptable. Other
business investments that some investors might consider unacceptable
include companies engaged in alcohol or tobacco manufacture, gambling,
pesticides, genetically-modified food production and hardwood timber
production. Investments might also be avoided in companies with a record
of creating environmental damage or pollution, or committing human rights
abuses.
Some institutional investors support social concerns with their investment
policy and some institutions operate ethical funds. However, SRI does not
mean accepting a lower financial return as the price for investing in a
socially responsible way. Low returns are unacceptable to any investment
institution

Investors concerns about social and environmental issues might grow as

large institutional investors acquire investment interests in many different
countries and in many different companies. These universal owners have
a direct concern about the future development and prosperity of entire
economies, and therefore need to consider the long-term implications of
business activities for long-term wealth and social prosperity.
(b) The pressure for socially responsible investment falls on institutional
investors rather than private individuals, since private individuals are free to
make their own ethical investment choices.
Institutional investors come under pressure to consider socially-responsible
investment largely because of external influences. The government might
have some influence: in the UK for example pension funds are required to
make disclosures about their socially-responsible investments, which has
led pension funds to develop clearly-expressed socially-responsible
investment policies. Institutional investors might also come under pressure
from their trade associations to consider ethical investments: SRI is
encouraged, for example, by the National Association of Pension Funds
and the Association of British Insurers in the UK.
There is also public pressure for ethical investment by institutional
investors, as public awareness of social and environmental issues grows.
Specific lobby groups might also put pressure on investors (by legal or
illegal means) to avoid investing in certain companies and industries, such
as companies engaged in scientific (laboratory) research using animals.
Institutions might also be reluctant to invest heavily in companies with a
bad public reputation i.e. a reputation for human rights abuses or causing
environmental damage.
There are also pressures within institutional investment organisations for
greater awareness of SRI issues. This may be due to the accountability of
some institutions such as pension funds to their own members.
(c) SRI has been a driver of corporate social responsibility. Since institutional
investors are increasingly aware of their responsibility for socially-
responsible investment, they require the companies in which they invest to
operate in a socially-responsible way.
It is questionable whether many companies would show concern for CSR
issues without pressure from shareholders (investors generally) although
concerns of the general public for social and environmental issues also
have some influence on CSR. The voluntary publication by many
companies of an annual social and environmental report or CSR report is a
response to pressure from institutional investors for information about these
issues.
Many institutional investors expect the companies in which they invest to
have regard to social and environmental issues because this is necessary
to protect long-term shareholder value. They require companies to
demonstrate their commitment to CSR issues, and in order to demonstrate
such commitment there must be suitable disclosures.
It is important to remember that SRI does not mean showing less concern
for financial returns. The use by some companies of triple bottom line
reporting provides a demonstration of concern for financial performance as
well as social and environmental issues.

Answers
20.7 CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility is the responsibility that each company has
towards the society (or societies) in which it operates. It includes responsibilities
for individuals, communities and the environment generally.
A justification for the view that companies have a social responsibility is that
companies, like individuals, are a citizen of their society. Companies are a
corporate citizen. All citizens have an obligation to act responsibly and to deal
fairly and properly with other citizens of society.
Good citizenship, and therefore corporate social responsibility, applies to the
following aspects of corporate activity.
(1) Ethical behaviour. Companies should behave ethically.
(2) Human rights. Companies should respect the rights of people. For
example, they should avoid dealing with suppliers who use child labour or
slave labour.
(3) Employee rights. They should respect the rights of employees and treat
them fairly as an employer.
(4) Dealings with communities. Companies should contribute to the welfare of
the communities in which they operate, in all countries.
(5) Environmental issues. Companies should show concern for the
environment and work towards the sustainability of their business.
It might also be argued that companies should be accountable to the rest of
society for their social and environmental behaviour. This is the reason why some
public companies publish annual CSR reports, social and environmental reports,
or sustainability reports.
20.8 CSR AND ENVIRONMENTAL STRATEGY

(a)
Business ethics and ethical conduct
Concern for the environment
Concern for the sustainability of business
Concern for human rights
Concern for employees
Concern for societies and communities
(b) An environmental strategy is a strategy to achieve specified objectives for
environmental standards. It is usually associated with ecological issues,
such as reducing pollution and waste, and sustainable development (such
as the preservation of forests and fishing stocks).
(c) In the longer term, a company may benefit from an environmental strategy
for several reasons.
Its reputation as an environment-friendly company might improve its
reputation with potential customers. The general public is increasingly
aware of green issues.
The strategy should force the company to develop environmental-
friendly processes and products at an acceptable cost.

The strategy might help the company to anticipate future changes in

the law or environmental regulations.
The strategy could therefore help the company to develop and
sustain its business over the longer term.
(d) Environmental standards are measurable targets for achievement in
relation to environmental issues, such as measures of pollution (carbon
dioxide emissions, toxic chemical content of waste and so on). Standards
may be set by individual companies, by industries or more generally for all
industries.
(e) Risk management:
Management may need to consider the risks from environmental issues:
to its reputation
from additional regulation
from costs of breaching regulations
from costs of complying with regulations
from costs of clean-up in the event of pollution
Corporate governance:
Many shareholders now expect to be informed of environmental issues by
their companies. Many companies produce a social and environment report
annually. For example, in the UK, quoted companies are required by
legislation to produce an annual business review, which will normally be
expected to consider environmental risks.

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2015
BUSINESS MANAGEMENT
AND STRATEGY
PRACTICE KIT

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2015

Business management and strategy

Emile Woolf International, November 2015

Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

Index to questions and answers

Chapter 1 - Strategy, stakeholders and mission

Emile Woolf International v The Institute of Chartered Accountants of Pakistan

3.5 Competitive Forces 8 76

Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

6.7 Suitability, Acceptability and 19 96

Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

8.16 Marketing Intelligence 29 117

Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

13.4 Human Resource Management I 40 140

Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

17.2 Risk Management Review 52 169

Emile Woolf International x The Institute of Chartered Accountants of Pakistan

1.1 MISSION STATEMENT I

1.2 MISSION STATEMENT II

Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

To advance cake making by demonstrating benefit to society and

1.3 DECISION MAKING PROCESS

1.4 VISION AND MISSION STATEMENTS

Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

1.6 FINE SUGAR MILLS

1.7 FORMAL BUSINESS STRATEGY

1.8 INNOVATIVE STRATEGY

1.9 POWER-INTEREST MATRIX

Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

CHAPTER 2 ENVIRONMENT ANALYSIS

2.1 FOREIGN D I R E C T INVESTMENTS AND POLITICAL RISK

2.2 POLITICAL RISK

2.3 JAPANESE EXPORTS

2.4 PESTEL MODEL

Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

2.5 AVIATION AND PESTEL ANALYSIS

2.6 PORTERS DIAMOND

2.7 NETWORK SOLUTIONS PESTEL ANALYSIS

Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

CHAPTER 3 COMPETITIVE FORCES

3.3 LIFECYCLE III

3.4 LIFE CYCLE IV

Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

Introduction Growth Maturity Decline

3.5 COMPETITIVE FORCES

3.6 EXIT BARRIERS

3.7 BOSTON CONSULTING GROUP MATRIX I

Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

3.8 BOSTON CONSULTING GROUP MATRIX II

3.9 PORTERS FIVE FORCES MODEL

3.10 FIVE FORCES MODEL OF COMPETITION

Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan

3.11 RAIL SEGMENTS

3.12 MARKET SEGMENTATION

Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan

CHAPTER 4 INTERNAL ANALYSIS

4.2 ADDED VALUE I

4.3 ADDED VALUE II

4.4 VALUE CHAIN

4.5 MODELLING, MEASURING, TARGETING