STRATEGIC BUSINESS MANAGEMENT

Time allowed – 3:30 hours

Total marks – 100

[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take
account of the quality of language and of the manner in which the answers are presented. Different parts, if
any, of the same question must be answered in one place in order of sequence]

Marks
1. The footwear industry is growing fast in Bangladesh. In addition to dedicated shoe manufacturers
whose sole business are footwear, many new players are entering into the sector looking at its export
prospects and its dependent on large pool of cheap workers similar to RMG. As of now it has many
players including artisanal shoemakers, local and foreign manufacturers, with local representatives,
producing a wide range of footwear. In Bangladesh, the footwear industry is making headway in the
local market, with most of the shoes being produced in and around Dhaka. The Dhaka Shoe
Manufacturing Company focuses on making footwear for almost all the security agencies in
Bangladesh, as well as some private security companies. The local market is also filled with individual
artisans and small startup companies who make footwear for sale in the country located mostly in
Dhaka’s Rayer bazar. The other regions in the country such as the Chittagong and the Northern
Region also have a few individuals who are into footwear manufacturing but on a smaller scale.
Foreign produced footwear is of superior quality and attract skimming pricing compared to the locally
produced ones. The sector is projected to have high growth potential with most of its forecasted sales
to emanate from low income segment with marginal and flat growth from middle and high-income
segments respectively. The growth, among other things, will be fueled by the government’s free
school uniform policy which is expected to be sourced from local manufacturers. In Bangladesh,
luxury shoes are usually European or American brands. The luxury footwear production in
Bangladesh is still a virgin market with a lot of potential once people start to believe in the high quality
these Bangladeshi brands can offer. On the average, it takes three to five years for local manufacturers
to ramp up production significant enough to drive down average fixed cost and attain utilization of full
capacity due to intense competition and difficulty accessing the major wholesale and retail outlets
trading in footwear. The foreign as well as a good number of local manufacturers sign 5 to 10 years
contract with major outlets in the entire major urban centers for exclusive rights to sell their footwear.
The artisanal shoemakers generally produce based on customer orders. In the Footwear industry,
customers easily source from many available alternatives. The key customers of foreign and local
manufacturers are the various wholesale and retail outlets. There are emerging online shops providing
information on prices of goods and services from different manufacturers including footwear free of
charge and consumers can easily access that information. The profit margins for the outlets are
generally low. There have been recent acquisitions of some local footwear manufacturing companies
by some major wholesale and retail distributors in Bangladesh and the experts are predicting more of
such transactions. In Bangladesh, there is a cartel of few major importers, controlling approximately
90% of high quality natural and synthetic leather market, from whom many local manufacturers and
artisanal shoemakers procure their raw materials. These importers source their supplies largely from
China and Europe which compares favorably, in terms of quality and price, to those available in
neighboring countries. A recent consumer survey indicates that footwear produced with inputs from
China and Europe are durable, of good quality and able to stand high temperature conditions locally
hence consumers preference.
Mark Footwear Ltd (MFL) was founded by Amin Ali, who graduated with bachelor’s degree in
Fine Arts, from a public university in Bangladesh. Prior to starting the company, Amin met one of
his schoolmates, who owned a business that specialized in traditional handicrafts including
footwear. He was able to convince him to join MFL. The schoolmate’s hands-on experience
coupled with Amin’s competence in drawing and designing will be complementary and
indispensable to gaining competitive edge. The initial capital for the company was raised from
personal savings and severance package received by Amin from his former employment. He was
able to acquire requisite tools and machines for the production of footwear. Based on the
determination and ambition of the founder, MFL outpoured its first production line with four
different products including shoes and sandals for men, women, children as well as boots for

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security personnel. The products were well received by the public. The company continued
production but it could hardly produce the quantity required by its retailers due to inadequate
funding. Amin, therefore, approached some banks for credit facility but due to lack of credit
history he was unsuccessful. Amin Ali decided to turn to his friend, Sanwar Ali, who lived in
Germany and had earlier expressed interest in investing in the business. Sanwar provided the
business with substantial amount of cash. The capital injection was used to buy more tools and
machines in a bid to significantly automate the production process. Additional hands were
engaged bringing the total number of employees to 100. Currently, the company produces on the
average 2,200 pair of shoes per month. The main raw materials for footwear, including natural
and synthetic leather, synthetic sole and adhesive, are sourced from local importers. MFL is
contemplating diversifying its raw materials. The shoes produced by the company are largely
distributed through major retail shops dotted across major urban centers since MFL does not have
the required resources to open its own sales outlets. The company also does direct sales to
students on campuses of some tertiary institutions in the country. On strategic approach, Amin
believes the company should continue to exclusively rely on engagement of experienced hands
from the industry and should waste no time in formalizing and documenting the company’s
strategy. Sanwar Ali also believes that the company should institutionalize a strategic approach
that should focus on the strategy process, financial planning and forecasting as well as sources of
finances. Financial planning and forecasting MFL has the potential of becoming a leading
producer of footwear in the Bangladesh market. It is however faced with liquidity challenges. The
management of MFL has decided to prepare a six-month budget in order to better manage its
liquidity needs and avoid any shortages especially in the light of limited access to bank credit.
Financial data
MFL has planned production and sales for the next nine months as follows:
Month April May June July Aug Sept Oct Nov Dec
Production (units) 700 800 1000 1200 1200 1400 1500 1500 1500
During the period, the business plans to advertise so as to achieve the projected sales. Payments for
advertising of BDT 12,000,000 and BDT 18,000,000 will be made in June and September
respectively. The selling price per unit will be BDT 120 throughout the period. 40% of sales are
normally made on two months’ credit. The other 60% are settled within the month of the sale. Raw
materials used for the footwear will be held for one month before they are taken into production.
Purchases of raw materials will be on one month’s credit. The cost of raw materials is BDT 60 per
unit of production. Other direct production expenses, including labour, are BDT 25 per unit. These
will be paid in the month incurred. Various production overheads, which during the period to 30
May had run at BDT 21,600,000 a month, are expected to rise to BDT 24,000,000 each month from
1 June to 30 September. These are expected to rise again from 1 October to BDT 28,800,000 a
month and to remain at that level for the foreseeable future. These overheads include a steady BDT
4,800,000 each month for depreciation. Overheads are planned to be paid 80% in the month of
production and 20 per cent in the following month. To help meet the planned increased production,
a new item of plant will be bought and delivered in July. The cost of this item is BDT 79,200,000;
the contract with the supplier will specify that this will be paid in three equal installments in August,
September and October. Raw materials inventories are planned to be 1,000 units on 1 June. The
balance at the bank on the same day is planned to be BDT 89,000,000. The company earns 5%
interest on the closing balance which is paid in the following month.

Requirements:
(a) Analyze the strengths and weakness of MFL. 6
(b) Prepare a report to the Director of MFL on the process of strategic management. 6
(c) Prepare a cash budget for the six months ending 30 November based on the financial
data of MFL. Show all workings. 8
(d) Recommend to the Directors of MFL strategies for overcoming the liquidity crisis. 6
(e) Advise the directors of MFL methods of raising long term capital. 4

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2. BBA Bank Ltd (BBA Ltd) is a listed company. It has been given a substantial fine by the
Bangladesh Bank for serious breaches of the banking regulations and, in the same month, the
bank reported that it had suffered large losses because of unauthorized dealings in financial
derivatives by a manager in its treasury department. The company’s reported profits for the
previous financial year were over-stated because of these losses. The chairman of the audit
committee of BBA Ltd has resigned, accepting responsibility for failures by the committee. A
newly-appointed director has been made chairman of the audit committee. He has called a
meeting with you the CFO. The purpose of the meeting is to review financial reporting and
internal control, with a view to making recommendations to the board. BBA Ltd does not have
a strong internal audit function and the company has been using the same firm of external
auditors since it acquired its listing 8 years ago.
Requirements:
(a) Explain the role and responsibilities of the audit committee of BBA Ltd with regards to:
i) The external audit of the company’s financial statements; and 4
ii) The internal control system and internal audit function 4
(b) In relation to the possible failures in internal controls that have occurred, suggest the
changes that might be recommended to the board at the next board meeting. 7

3. The glass industry in Bangladesh supplies glass to the developers and other household
suppliers. There are five major glass manufacturing entities, each with market coverage of
between 5% and 40%. Quesh Ltd. is a listed company and a major player in the glass industry.
It has a market share approximately 35%. It is an old, well established entity with a number of
factories used to manufacture glass both locally and abroad. It has a stable but unexciting
growth rate of 3% per annum and is facing increasing competition from new glass
manufacturing entities setting up in its key markets. However, Quesh’s high earnings levels of
earlier years have resulted in relatively low levels of debt.

The head office building of Quesh is in the far north of the country in a remote geographical
area. It is a considerable distance from the capital city and major centers of population in the
south of the country. The building is much larger than the entity requires and several floors are
unoccupied. The management team of the company is highly experienced; the majority of the
senior managers have worked for Quesh for the whole of their working lives. The computer
systems of the company were written especially for the entity but are in need of replacement in
favour of something more flexible and adaptable to changing circumstances.
Zahid Ltd. with a market share of 10%. is a comparatively new and small but fast growing
unquoted family-owned entity. It specializes in certain niche markets for high security and extra
heat-resistant glass. The patents for this specialist glass were developed by the founder owner
who now acts as Managing Director. The development of the business has largely been funded by
high levels of borrowings at rates of interest well above standard market rates. In addition, the
directors have often been required to provide personal guarantees against personal assets. The
management team of the company works in Dhaka. The company has a manufacturing base on
the outskirts of the capital city. The management team of the company is enthusiastic to grow the
business but is continually frustrated by a lack of financial and human resources and marketing
network that would enable the companyto expand into international markets. Also, on a personal
level, many of the senior managers own a substantial number of shares in the company and are
keen to realize some of their capital gains and become financially more secure. The computer
systems of the company consist of a basic accounting package and an internal network of PCs.
Spreadsheet packages are widely used for budgeting and other financial reporting.
The directors of Quesh Ltd. have approached the directors of Zahid Ltd. with a view to making
a takeover bid for Zahid Ltd. A condition of the bid would be the retention of the current
management team of Zahid Ltd. who have vital knowledge of the specialist manufacturing
techniques required to manufacture the product range of Zahid Ltd. The directors of Zahid Ltd.
have been initially quite positive about the bid.

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 Both parties are concerned that the deal may be referred to Competition Commission, which
regulates the Country's competition policy. For approval and that conditions may be imposed
that could make the takeover less attractive.
Requirements:
(a) Advise the directors of Quesh Ltd. and Zahid Ltd. on the potential problems of merging the
management structure and systems of the two entities and how these could be minimized; 5
(b) Discuss whether the choice of capital structure for the new combined entity is likely to
affect the overall value of the entity. Include references to Modigliani and Miller's
theory of capital structure in your answer. 5

4. (a) The Govt. of Bangladesh has enacted Financial Reporting Act (FRA) 2015 in September
2015. According to FRA 2015, Chartered accountants and cost and Management
Accountants are defined as “Professional Accountants”. In recent time, professional
accountants face many threats in the performance of their duties that may negatively affect
accountants’ objectivity and independence. One of such threats is intimidation threat which
may arise from close business relationships, family and personal relationships, and
assurance staff members moving to employment with client as well as actual and threatened
litigation. Section 48 and 50 of FRA 2015 empowered Financial Reporting Council (FRC),
formed under FRA 2015, to penalize auditors and accounts for non-compliance of IFRS
and guidelines issued by FRC and any other relevant laws of the land.
Requirement:
Explain safeguards you will consider to deal with actual and threatened litigation as a
professional accountant. 5

(b) Hall Co. has just acquired a subsidiary called W as part of a larger acquisition. Hall Co. has
no other subsidiaries in the same business sector as W, so management are considering
disposing of W. A small listed company called B, whose core business is similar to W, has
been identified, and by using all published and any other information reasonably available,
the following analysis has been prepared:
W B
Return on Capital Employed (ROCE) 14.9% 25.0%
Asset turnover 1.3 times 1.8 times
Net profit margin 11.5% 13.9%
Current ratio 1.5 times 2.2 times
Inventory holding period 68 days 57 days
Receivables collection period 54 days 43 days
Payables payment period 49 days 37 days
Other key Information:

• B has a Price Earnings Ratio (P/E) ratio of 18 times.

• W made an operating profit of Tk. 860,000 last year.
• W has total non-current assets of Tk.4.87m, out of which land and buildings comprise
Tk.2.54m. Its net assets at book value are Tk.5.77m.
• The tax rate is 35%.

Requirement:
As the Financial Consultant of Hall Co., prepare a report to the directors in which you
analyze the performance of W compared with B; and recommend a price which Hall Co.
ought to seek for the disposal of W. 10

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5. There are around 160 million people in Bangladesh of which only 13 percent have bank
accounts whereas more than 80 percent are mobile phone users. Banks can now offer the
banking services to both the rural community and the population (without banking transaction)
through mobile phones. The government of Bangladesh has been concerned with low savings
culture, low financial inclusion as well as high cash-based transactions in the country. In the
year 2011, the government decided to pursue policies to grow the financial services industry
(FSI) since it was indispensable to the accelerated economic growth required to make the
country middle income country.

There is generally high cost of credit in the country as the banks complain of difficulty in
mobilizing deposits. Bangladesh is said to have one of the highest lending rates to the world,
placing second in the latest ranking released by Trading Economics, a development which has
been identified as a disincentive for the business community. The government budget deficit as
a percentage of Domestic Product (GDP) decreased remarkably. In the past, the government
relied on external capital markets to fund the budget deficits but, following the worsening
deficit figures, international financial organizations have raised concerns about the need for the
government to ensure fiscal discipline.

The major development that revolutionized the FSI launched mobile money solution in 2011 by
a bank. Mobile money rides on the backbone of the mobile telephony infrastructure of the
mobile networks operators. This allows mobile money to be operated from wherever there is
network coverage. It is estimated that there is 95% mobile network coverage in Bangladesh.

The Mobile Network Operators (MNOs) deliver mobile financial services largely through
thousands of registered mobile money agents throughout the country. This effectively makes
agents closer to the customers than traditional banks. Most of the traditional banks’ branch
networks are concentrated in the urban centers to the exclusion of pre-urban and rural
communities. The combination of these two factors enables mobile money services to be
administered quickly and efficiently, and in the most remote areas. The capital requirement for
registration as mobile money agent is Nil and the daily transaction limit is currently varies at
Tk. 50,000. On the average, agents operate one network’s mobile money, while very few agents
have signed up to two or more different mobile money solutions. The total number of agents
has increased from about 400,000 in 2014 to 817,000 in 2019.
The Environment
Mobile money started in the country largely with two products – airtime purchases and
domestic remittances for small amounts. With the passage of time, mobile money service
offerings have expanded to include bill payments, Point of Sales (POS) payments, fund
transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial
institutions. The expansion of the product offerings from mobile money makes it more
appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore,
keeping larger amounts in their wallets than they used to, and are using the expanding offerings
from mobile money at the expense of existing products from the banks. There is growing
mobile phone penetration rate as increasing number of mobile phone users are subscribing to
more than one mobile network.
Furthermore, mobile money has become very popular among middle and lower income earners who
make up about 80% of the population. The operation of mobile money on the handset is very easy
and convenient and can be done from the comfort of one’s location. All that prospective mobile
money customers require are a registered SIM card on the network of choice and a valid national
ID. With these they can be set up and ready to use their mobile wallets within minutes. The
processes for setting up and using bank accounts are however more complex due to stricter Know
Your Customer (KYC) requirement by the Central Bank. Remittances through mobile money are
instant at a fee of 1% of amount remitted or received. Mobile money transactions in Bangladesh
reached Tk. 1000 million by the end of June 2019, according to the central bank’s Payment Systems
and it is expected to hit Tk. 350 billion by the close of 2020. Until very recently, the income from
mobile money was not taxed but the Minister of Finance in his 2017 mid-year review hinted of
plans to impose a tax on the fees from mobile money operations.
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The mobile money operations face the issue of network instability and system downtime as
mobile network operators have not correspondingly expanded their infrastructure to match the
growing subscribers. Sometimes, the agents are unable to meet cash demands of the customers
due to mismatch in net remittances. This is more pervasive in the rural communities. Due to the
weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards
and this has resulted in fraudsters having a field day. Some agents and customers have lost
sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to
carry out mobile money services across the various networks. Accordingly, the Central Bank
has tasked its Payment Systems Department to ensure interoperability of mobile money across
all networks in the country by December 2019. The government believes that mobile
interoperability will deepen financial inclusion.

Regulation
Mobile money services it has operated without any regulatory framework. The industry players,
according to a recent survey, suggested that the long-term survival of the mobile money service
require stringent regulation. The Central Bank has now published guidelines for mobile money
operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include
stringent KYC on the agents before registration, monthly returns on the activities of the agents,
prosecution of the agents for mobile money fraud, etc. The mobile network operators are
required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal
The Board of Directors of Excel Telephone Ltd. at a recent meeting discussed the possibility of
opening a new unit to provide mobile money service to take advantage of the newly regulated
industry. The Finance Director has presented a five-year estimates for the new venture as:

Year 0 1 2 3 4 5
Tk.'000 Tk.'000 Tk.'000 Tk.'000 Tk.'000 Tk.'000
Cost of capital asset (400)
Total investment in (40) (50) (60) (70) (70) -
net working capital
Gross Fees - 500 600 700 700 600
Direct and other costs - (310) (370) (430) (430) (390)
Depreciation - (80) (80) (80) (80) (80)
Interest - (48) (48) (48) (48) (48)
Profit - 62 102 142 142 82
Net total assets 440 400 422 440 480 380
For taxation purposes, capital allowances will be available against the taxable profits of the
venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be
granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid
one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The
after-tax weighted average cost of capital is estimated to be 24% per anum.
Requirement:
(a) Assess three environmental factors faced by Excel Telephone Ltd. 6
(b) Analyze the competitive environment of mobile money segment using Porter’s Five Forces. 5
(c) Identify and explain four critical success factors for the successful mobile money service
operations. 6
(d) Determine the viability of the project using Net Present Value (NPV) technique and
advise the Board of Directors whether to invest or not. 10
(e) Recommend three strategies which the Board of Directors could implement to give Excel
Telephone Ltd. a competitive edge. 3

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