Professional Documents
Culture Documents
Enterprise Pillar
E3 – Enterprise Strategy
Thursday 30 August 2012
E3 – Enterprise Strategy
Instructions to candidates
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to begin using your computer to produce your
answer or to use your calculator during the reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).
ALL answers must be submitted electronically, using the single Word and
Excel files provided. Answers written on the question paper and note paper
will not be submitted for marking.
You should show all workings as marks are available for the method you use.
The pre-seen case study material is included in this question paper on pages
2 to 8. The unseen case study material, specific to this examination, is
provided on pages 10 and 11.
Your computer will contain two blank files - a Word and an Excel file.
Please ensure that you check that the file names for these two documents
correspond with your candidate number.
TURN OVER
Introduction
B Supermarkets (B) was founded as a grocery retailer in a European country in 1963. Its sales
consist mainly of food and household items including clothing. B now owns or franchises over
15,000 stores world-wide in 36 countries. The company has stores in Europe (in both eurozone
and non-eurozone countries), Asia and North America. B’s head office is located in a eurozone
country. B has become one of the world’s largest chains of stores.
B’s Board thinks that there are opportunities to take advantage of the rapid economic growth of
some Asian countries and the associated increases in demand for food and consumer goods.
Structure
The B Group is structured into a holding company, B, and three subsidiary companies which are
located in each of the regions of the world in which it operates (Europe, Asia and North
America). The subsidiary companies, referred to as “Regions” within B, are respectively B-
Europe, B-Asia and B-North America.
A supermarket is a self-service store which sells a wide variety of food and household goods
such as washing and cleaning materials, cooking utensils and other items which are easily
carried by customers out of the store.
A hypermarket is a superstore or very large store which sells the same type of products as a
supermarket but in addition it sells a wide range of other items such as consumer durable white
goods, for example refrigerators, freezers, washing machines and furniture. Hypermarkets are
often located on out-of-town sites.
A discount store is a retail store that sells a variety of goods such as electrical appliances and
electronic equipment. Discount stores in general usually sell branded products and pursue a
high-volume, low priced strategy and aim their marketing at customers who seek goods at prices
which are usually less than can be found in a hypermarket.
A convenience store is a small shop or store in an urban area that sells goods which are
purchased regularly by customers. These would typically include groceries, toiletries, alcoholic
beverages, soft drinks and confectionery. They are convenient for shoppers as they are located
in or near residential areas and are often open for long hours. Customers are willing to pay
premium prices for the convenience of having the store close by.
B sells food products and clothing in its supermarkets and hypermarkets at a higher price than
many of its competitors because the Board thinks that its customers are prepared to pay higher
prices for better quality food products. B also sells good quality consumer durable products in its
supermarkets and hypermarkets but it is forced to sell these at competitive prices as there is
strong competition for the sale of such goods. B’s discount stores sell good quality electrical
products usually at lower prices than those charged in its supermarkets and hypermarkets, B
only sells electronic equipment in its discount stores. Customers have a greater range from
which to choose in the discount stores as compared with supermarkets and hypermarkets
because the discount stores specialise in the goods which they sell. B’s convenience stores do
not have the availability of space to carry a wide range of products and they charge a higher
price for the same brand and type of goods which it sells in its supermarkets.
Although B owns most of its stores, it has granted franchises for the operation of some stores
which carry its name.
Nearly 0.5 million full-time equivalent staff are employed world-wide in the Group. B tries when
possible to recruit local staff to fill job vacancies within its stores.
“B practises sustainable investment within a healthy ethical and thoughtful culture and strives to
achieve customer satisfaction by giving a courteous and efficient service, selling high quality
goods at a reasonable price, sourcing goods from local suppliers where possible and causing
the least damage possible to the natural environment. By this, we aim to satisfy the expectations
of our shareholders by achieving consistent growth in our share price and also to enhance our
reputation for being an environmentally responsible company.”
Strategic objectives
The following objectives have been derived from the mission statement:
1. Build shareholder value through consistent growth in the company’s share price.
2. Increase customer satisfaction ratings to 95% as measured by customer feedback
surveys.
3. Increase commitment to local suppliers by working towards achieving 40% of our
supplies from sources which are local to where B stores trade.
4. Reduce carbon emissions calculated by internationally agreed measures by at least 1%
per year until B becomes totally carbon neutral.
5. Maximise returns to shareholders by employing different generic competitive strategies
depending on the market segment in which B stores trade.
Financial objectives
The Board has set the following financial objectives:
Governance
The main board comprises the Non-executive Chairman, the Chief Executive and nine Executive
directors. These cover the functions of finance, human resources, corporate affairs (including
legal and public relations), marketing, planning and procurement. There is also one executive
director for each of the three regions, being the Regional Managing Directors of B-Europe, B-
Asia and B-North America. There are also nine non-executive main board members in addition
to the Chairman.
The main Board of Directors has separate committees responsible for audit, remuneration,
appointments, corporate governance and risk assessment and control. The Risk Assessment
and Control Committee’s tasks were formerly included within the Audit Committee’s role. It was
agreed by the Board in 2009 that these tasks should be separated out in order not to overload
the Audit Committee which has responsibilities to review the probity of the company. B’s
expansion has been very rapid in some countries. The expansion has been so rapid that B has
not been able to carry out any internal audit activities in some of these countries to date. The
regional boards do not have a committee structure.
Each of the Regional Managing Directors chairs his or her own Regional Board. All of the
Regional Boards have their own directors for finance, human resources, corporate affairs,
marketing, planning and procurement but their structure is different for the directors who have
responsibility for the stores. In B-Asia, one regional director is responsible for the hypermarkets
and supermarkets and another is responsible for discount stores and convenience stores. In B-
North America, one regional director is responsible for the hypermarkets and supermarkets and
another is responsible for discount stores (B does not have any convenience stores in North
Treasury
Each of B’s three regions has a regional treasury department managed by a regional treasurer
who has direct accountability to the respective Regional Director of Finance and professional
accountability to the Group Treasurer. The Group Treasurer manages the central corporate
treasury department which is located in B’s head office. The Group Treasurer, who is not a main
board member, reports to the Director of Finance on the main board.
Shareholding, year-end share prices and dividends paid for the last five years
B is listed on a major European stock exchange within the eurozone and it wholly owns its
subsidiaries. There are five major shareholders of B, including employees taken as a group,
which between them hold 25% of the 1,350 million total shares in issue. The major shareholders
comprise two long term investment trusts which each owns 4%, a hedge fund owns 5%,
employees own 5% and the founding family trust owns 7% of the shares. The remaining 75% of
shares are owned by the general public.
The year-end share prices and the dividends paid for the last five years were as follows:
B’s management control system, which operates throughout its regions and at head office, is
well known in the industry to be bureaucratic and authoritarian. Strict financial authority levels for
development purposes are imposed from the main Board. There is tension between the main
Board and the regional boards. The regional board members feel that they are not able to
manage effectively despite being located much closer to their own regional markets than the
members of the main Board. The main Board members, on the other hand, think that they need
to exercise tight control because they are remote from the markets. This often stifles planning
initiatives within each region. This tension is also felt lower down the organisation as the regional
board members exercise strict financial and management control over operational managers in
their regions in order to ensure that the main Board directives are carried out.
Competitive overview
B operates in highly competitive markets for all the products it sells. The characteristics of each
of the markets in which it operates are different. For example, there are different planning
restrictions applying within each region. In some countries, B is required to operate each of its
stores in a partnership arrangement with local enterprises, whereas no such restriction exists
within other countries in which it trades. B needs to be aware of different customer tastes and
preferences which differ from country to country. The following table provides a break-down of
B’s stores in each region.
Market share
Europe 20%
Asia 1%
North America 1.5%
The following table shows the sales revenue and net operating profit earned by B in each of its
regions for the year ended 31 December 2011:
B is constantly seeking other areas of the world into which it can expand, especially within Asia
where it perceives many countries have an increasing population and strengthening economies.
In the year ended 31 December 2011, B reduced its consumption of kilowatt hours (kWh) per
square metre of sales area as compared with the year ended 31 December 2008 by 9%. The
target reduction for that period was 5%. In the same period it reduced the number of free
disposable plastic bags provided to customers per square metre of sales area, by 51% against a
target of 60%. Its overall greenhouse gas emissions (measured by kilogrammes of carbon
dioxide per square metre of sales area) reduced by 1% in 2011 which was exactly on target.
B provides funding for the development of local amenity projects in all of the countries where B
stores operate. (An amenity project is one which provides benefit to the local population, such as
providing a park, community gardens or a swimming pool.)
B’s inventory is rarely transported by rail except within Europe. This has resulted in lower
average reductions in carbon emissions per square metre of sales area by stores operated by B-
Sustainable investments:
B aspires to become carbon neutral over the long term. The Board aims to reduce its carbon
emissions by investing in state of the art technology in its new store developments and by
carrying out modifications to existing stores.
Human Resources:
B prides itself on the training it provides to its staff. The training of store staff is carried out in
store by specialist teams which operate in each country where B trades. In this way, B believes
that training is consistent across all of its stores. In some countries, the training is considered to
be at a sufficiently high level to be recognised by national training bodies. The average number
of training hours per employee in the year ended 31 December 2011 was 17 compared with 13
hours in the year ended 31 December 2010. In 2011, B employed 45% more staff with declared
disabilities compared with 2010.
B’s information systems are not perfect as stock-outs do occur from time-to-time, especially in
the European stores. This can be damaging to sales revenue when stock-outs occur during peak
sales periods such as the days leading up to a public holiday. In Asia and North America in
particular, B’s information technology systems sometimes provide misleading information. This
has led to doubts in the minds of some head office staff about just how robust are B’s inventory
control systems.
As is normal in chain store groups, there is a certain degree of loss through theft by staff and
customers. Another way that loss is suffered is through goods which have gone past their “sell-
by” date and mainly relates to perishable food items which are wasted as they cannot be sold to
the public. In most countries, such food items which cannot be sold to the public may be sold to
local farmers for animal feed.
Regulatory issues
B’s subsidiaries in Asia and North America have sometimes experienced governmental
regulatory difficulties in some countries which have hindered the installation of improved
information systems. To overcome some of these regulatory restrictions, B-Asia and B-North
America have, on occasions, resorted to paying inducements to government officials in order for
the regulations to be relaxed.
Group
Treasurer
Regional
Treasurer
*Applies to B-Asia only. In B-North America, where there are no Convenience stores, there is a Regional Director responsible for Discount stores
as well as the Regional Director responsible for Supermarkets and Hypermarkets. B-Europe’s structure has three Regional Directors responsible for
the stores, one each responsible for Supermarkets and Hypermarkets, Discount Stores and Convenience Stores.
APPENDIX 2
Notes € million
Revenue 109,712
Operating costs (103,501)
Net operating profit 6,211
Interest income 165
Finance costs (852)
Corporate income tax (1,933)
PROFIT FOR THE YEAR 3,591
€ million
ASSETS
Non-current assets 57,502
Current assets
Inventories 7,670
Trade and other receivables 1,521
Cash and cash equivalents 3,847
Total current assets 13,038
Total assets 70,540
Non-current liabilities
Long term borrowings 15,744
Current liabilities
Trade and other payables 30,777
Total liabilities 46,521
Total equity and liabilities 70,540
Notes:
1. There are 1,350 million €1.50 shares currently in issue. The share price at 31 December
2011 was €31.37.
TURN OVER
Question One
Unseen case material
Rationalisation in Country W
B’s first venture to open stores outside Europe was in Country W in 1982. Initially, this was very
successful but the current business environment is very competitive and the forecast results
shown below have prompted questions about the continued viability of B’s business operations
in Country W.
B's business in Country W is organised into four sectors which cover the four different types of
store which it operates there. Each sector has a sector manager who reports to the Regional
Managing Director responsible for Country W. The individual store managers report to the
sector managers who are senior to them.
Table 1: B's forecast sector profit/(loss) for Country W for year ended 31 December 2012
Sector Super- Hyper- Discount Convenience Total %
markets markets stores stores
€ million € million € million € million € million
Revenue 330 450 300 120 1,200 100
Costs
Trading 198 243 225 72 738 62
Establishment 33 18 30 12 93 8
Regional Office 68 204 34 34 340 28
Profit/Loss 31 (15) 11 2 29 2
Notes:
The amounts in Table 1 have been converted from Country W's currency to euros.
Trading costs are all variable with revenue.
Establishment costs are all variable with revenue.
The regional office costs are all fixed. They comprise:
Insurances of €35 million
Property taxes of €100 million
B Supermarkets' management charge of €205 million. This is a central charge imposed by
B Supermarkets: its basis is not disclosed to sector managers and it is a non-negotiable
charge.
The regional office costs are apportioned on the basis of the floor areas of the sector's
properties as shown below:
Supermarkets Hypermarkets Discount stores Convenience stores
% % % %
20 60 10 10
The Regional Managing Director responsible for Country W is very dissatisfied with the forecast
sector trading results and considers that the forecast profit of €29 million is unacceptable. The
Regional Managing Director responsible for Country W proposes to close the hypermarkets
which he believes should improve the profit to €44 million.
However, the Sector Manager of Country W's Hypermarkets has argued that:
1. The current apportionment base of the regional office costs is unfair because these costs
are not directly related to floor area but are more closely associated with the revenues
generated by each of Country W's four trading sectors;
Competitive strategy
The Regional Managing Director responsible for Country W has attempted to manage B's
business in Country W within the spirit of the company's mission statement, particularly 'selling
high quality goods at a reasonable price'. However, he realises that this strategy has not been
successful for all of the business sectors in Country W. The Sector Manager for Country W's
Convenience Stores has commented that 'B's business in Country W is going nowhere: we are
stuck in the middle. We should develop different competitive strategies to fit the characteristics
of each of our four sectors'. Country W's four sectors have the following characteristics:
Discount Highly regarded Expect prices to be Limited range of Customers Competition is 15%
Stores for its specialist lower than in branded and are extreme- mixed: some
range of hypermarket. Mid 'own branded' ly price is very
products and lower income goods. sensitive. profitable,
groups. innovative and
efficient: some
is trading at a
loss and very
badly
organised.
Convenience No clear identity. Live locally. Mid and Low value items. Customers One national 10%
Stores Some stores are upper income will pay a chain which
market leaders; groups. premium has 65% of
others are price if the market.
market laggards. location Remaining
convenient. 25% is
fragmented.
(a) (i) Calculate the forecast sector contribution margins and the forecast total profit
or loss for Country W for year ended 31 December 2012.
You should assume that:
• The Hypermarkets sector is closed on 30 September 2012.
• The Hypermarkets sector's costs and revenues accrue equally
throughout 2012.
(3 marks)
(ii) Calculate the revised forecast sector profits and forecast total profit for
Country W for year ended 31 December 2012.
You should assume that:
• The regional office costs are allocated on the basis of sector revenue.
• The Hypermarkets are not closed.
(3 marks)
(b) Prepare a report evaluating the strategic proposal, made by the Regional
Managing Director responsible for Country W, to close the Hypermarkets sector.
In your report you should:
(i) Discuss, in turn, each of the four arguments put forward by the Sector
Manager for Country W's Hypermarkets.
(12 marks)
(ii) Advise B of the strategic implications that closing the Hypermarkets
might have on B's future operations within Country W.
(12 marks)
Your report should consider both the financial and non-financial effects of the
proposal by the Regional Managing Director responsible for Country W to close the
Hypermarkets sector.
End of Section A
Section B starts on page 16
TURN OVER
TURN OVER
Question Two
WWW is an international company based in Europe which trades principally in Asia and Europe.
In its published Code of Ethics WWW has committed itself to 'being a company that will trade
fairly and sustainably'. WWW has been following an expansion strategy which has led to the
following three situations occurring:
Situation 1
At a recent presentation to investment analysts and financial journalists, WWW’s Chief
Executive Officer (CEO) gave a very optimistic forecast for the company’s future, suggesting
that revenue would double over the next three years and profits and dividends would increase
by 50%.
However, the CEO had prepared his forecast in a hurry and had not had it confirmed by
anybody else within WWW. He did not mention that WWW's home Government was
considering taking legal action against WWW for underpayment of excise duties and had made
a claim for large damages. If this claim was to be successful it would materially affect WWW’s
profit in 2013.
Situation 2
In connection with the legal case in 1, WWW's home Government had obtained a court order
that all documents relating to WWW’s export trade should be made available to the
Government's lawyers.
However, many of the documents covered by the court order were the subject of confidentiality
agreements between WWW and various entrepreneurs. These documents included details of
patents and processes with a high commercial value and if knowledge of these became public it
would destroy some of WWW’s competitive advantage.
Situation 3
This situation, which is unconnected to situations 1 and 2, has also occurred. WWW has a joint
venture agreement with a company, ZZZ. Under the terms of the joint venture agreement each
company has to make regular returns of financial performance to the other. ZZZ is always late
in making its returns, which are usually incomplete and contain many errors. ZZZ's accounting
staff are very reluctant to co-operate with WWW’s accounting staff and the working relationship
between the two companies is poor.
WWW’s financial controller has been involved in a review of the joint venture with ZZZ. Due to
the many problems that ZZZ has caused him and his staff he has advised discontinuing the joint
venture.
(b) Advise WWW of the stages of a procedure it could use to resolve ethical conflicts.
(7 marks)
(c) Recommend, giving your reasons, TWO current ethical issues, other than those
contained in CIMA's Code of Ethics, that could be included in WWW's Ethical Code.
(6 marks)
TURN OVER
HHH is aware of a nearby comparable university, SSS, which has had much success when
several of its departments have worked together to improve their student performance. SSS has
a culture of sharing knowledge and a knowledge management strategy. HHH does not have a
culture of knowledge sharing. Within HHH, knowledge is regarded as the personal property of
the individual and very few of its staff are prepared to share their knowledge with any of their
colleagues. HHH has an abnormally high level of staff turnover compared to other universities.
It is twice as high as that of SSS.
Student performance
Student performance is measured by HHH as the number of students successfully completing
their courses. Those students who do not successfully complete their course are described as
'drop-outs'. The number of drop-outs is measured by the drop-out rate. HHH has access to
data for all UK universities for student drop-out rates analysed by age and gender.
Drop-out rates vary greatly across HHH's academic departments. In some academic
departments the drop-out rate is extremely high; in others it is very low, much better than the
national average. Where the drop-out rate is much better than the national average, the
departments have operated extensive schemes for student support. For example, students with
personal problems can seek help from trained counsellors, students with financial problems
have been helped to find part-time work and students with academic problems are given extra
individual tuition from the academic staff.
In the departments where the drop-out rates are extremely high, none of these student support
schemes is operating. The departments with the extremely high drop-out rates are not aware of
how the departments with the very low drop-out rates support their students. The departments
with the very low drop-out rates are unwilling to share their knowledge about how to reduce the
drop-out rates as they have spent considerable time and effort developing their schemes and
regard these as their own property.
HHH has not conducted any systematic analysis into its overall drop-out rate. Within its
information systems, HHH has the following information about each of its students:
• Name
• Age
• Gender
• Address
• Educational record prior to joining HHH
• Educational record within HHH
• Academic department
HHH is aware that many universities have successfully used data mining to assist them in
managing student performance.
Explain, using examples, the advantages that HHH would gain by doing the same.
(3 marks)
(ii) of a total of FOUR social and technical problems HHH might encounter in
operating a knowledge management system.
(8 marks)
(c) Explain data mining and how the outputs of the analysis could be used by HHH to
improve the student drop-out rates.
(8 marks)
TURN OVER
As a large proportion of BBB's products are clothes which only remain fashionable for a short
period, it is important that good inventory control is maintained. BBB has recently invested in a
robotic system to improve materials handling in its warehouse.
As a service to its customers, BBB will deliver to their home, within 24 hours, any items bought
from one of its shops. BBB's competitors do not offer such a service. BBB knows that it has
demanding customers who appreciate the retail experience and after sales service which BBB
offers. If a customer has any dissatisfaction with a purchase, BBB will make a refund without
question. BBB frequently sends its regular customers special offers and invites them to fashion
shows held in its shops.
BBB’s head office is organised into departments which are responsible for the procurement of
products, setting of personnel policies, investigating innovations in fashion retailing and general
corporate administration.
BBB’s management accountant has been investigating the acquisition of high-tech ‘Smart Tills’
which would provide the following information for each shop:
• Sales transactions and analysis
• Staff statistics (sales per staff member)
• Gross profit
• Inventory turnover and balances
• Audit information (a database recording all transactions)
If BBB replaces its existing tills with Smart Tills, it will be able to better manage cash and
inventory and optimise its sales due to accurate real time information. This will have the benefits
of identifying and controlling wastage and improve the accuracy of its forecasts.
The overall advantages offered by the Smart Tills are that BBB will be able to react more quickly
to customer demand, ensure that it has sufficient stock in its shops, minimise wastage, reduce
its investment in working capital and enable its head office to know, on a real-time basis, how
well each of its shops is trading.
(c) Recommend FOUR key stages that BBB should include in a plan to introduce Smart
Tills into all its shops.
(8 marks)
FORMULAE
Annuity
Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year, discounted at
r% per annum:
1 1
PV = 1 − n
r [1 + r ]
Perpetuity
Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per
1
annum: PV =
r
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of
Level 2 - COMPREHENSION
What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning or
purpose of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
Level 3 - APPLICATION
How you are expected to apply your knowledge. Apply Put to practical use
Calculate Ascertain or reckon mathematically
Demonstrate Prove with certainty or to exhibit by
practical means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
Level 4 - ANALYSIS
How are you expected to analyse the detail of Analyse Examine in detail the structure of
what you have learned. Categorise Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct Build up or compile
Discuss Examine in detail by argument
Interpret Translate into intelligible or familiar terms
Prioritise Place in order of priority or sequence for action
Produce Create or bring into existence
Level 5 - EVALUATION
How are you expected to use your learning to Advise Counsel, inform or notify
evaluate, make decisions or recommendations. Evaluate Appraise or assess the value of
Recommend Advise on a course of action
E3 – Enterprise Strategy
September 2012
Thursday Session