All questions are compulsory and MUST be attempted

1 Cheapkit is a large clothes retailer in a major developed country. Its business strategy is based
around vigorous cost leadership and it prides itself on selling fashionable garments for men,
women and children at very low prices compared to its main rivals. For many years, it has
achieved this cost leadership through carefully sourcing its garments from developing
countries where labour is cheaper and where workplace regulation is less than in its home
country.

As a company with a complex international supply chain, the board of Cheapkit regularly
reviews its risks. It has long understood that three risks are of particular concern to the
Cheapkit shareholders: exchange rate risk, supply risk and international political risk. Each
one is carefully monitored, and the board receives regular briefings on each, with the board
believing that any of them could be a potential source of substantial loss to the shareholders.

For the past decade or so, Cheapkit has bought in a substantial proportion of its supplies from
Athland, a relatively poor developing country known for its low labour costs and weak
regulatory controls. Last year, 65% of Cheapkit’s supplies came from this one country alone.
Athland has a reputation for corruption, including government officials, although its
workforce is known to be hard-working and reliable. Most employees in Athland’s garment
industry are employed on ‘zero hours’ contracts, meaning that they are employed by the hour
as they are needed and released with no pay when demand from customers like Cheapkit is
lower.

Half of Cheapkit’s purchases from Athland are from Cornflower Company, a longstanding
supplier to Cheapkit. Owned by the Fusilli brothers, Cornflower outgrew its previous factory
and wished to build a new manufacturing facility in Athland for which permission from the
local government authority was required. In order to gain the best location for the new
factory and to hasten the planning process, the Fusilli brothers paid a substantial bribe to local
government officials.

The Fusilli brothers at Cornflower felt under great pressure from Cheapkit to keep their prices
low and so they sought to reduce overall expenditure including capital investments. Because
the enforcement of building regulations was weak in Athland, the officials responsible for
building quality enforcement were bribed to provide a weak level of inspection when
construction began, thereby allowing the brothers to avoid the normal Athland building
regulations. In order to save costs, inferior building materials were used which would result
in a lower total capital outlay as well as a faster completion time. In order to maximise usable
floor space, the brothers were also able to have the new building completed without the
necessary number of escape doors or staff facilities. In each case, bribes were paid to officials
to achieve the outcomes the Fusilli brothers wanted.

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Once manufacturing began in the new building, high demand from Cheapkit meant that
Cornflower was able to increase employment in the facility. Although, according to Athland
building regulations, the floor area could legally accommodate a maximum of 500 employees,
over 1,500 were often working in the building in order to fulfil orders from overseas
customers including Cheapkit.

After only two years of normal operation, the new Cornflower building collapsed with the loss
of over 1,000 lives. Collapsing slowly at first, the number of people killed or injured was made
much worse by the shortage of escape exits and the large number of people in the building.
As news of the tragedy was broadcast around the world, commentators reported that the
weakness in the building was due to the West’s ‘obsession with cheap clothes’. Cheapkit was
criticised as being part of the cause, with many saying that if retailers in the developed world
pushed too hard for low prices, this (the collapse of the building) was one consequence of
that. In response, Cheapkit’s public relations department said that it entered into legal
contracts with Cornflower in order to provide its customers with exceptional value for money.
Cheapkit said that it was appalled and disgusted that Cornflower had acted corruptly and that
the Cheapkit board was completely unaware of the weaknesses and safety breaches in the
collapsed building.

One of those able to escape the building was Jess Lui, who was also the leader of a national
pressure group ‘Protect workers’ rights’ (PWR) lobbying the Athland government for better
working conditions and health and safety practices for workers in the country. Having seen
hundreds of people killed and injured in the collapsed building, she believed that although
the government could do more, much of the blame lay with Cheapkit and the pressure it
continually placed on Cornflower to keep its prices low. Jess questioned whether
multinational companies such as Cheapkit should be allowed to exert so much economic
pressure on companies based in developing countries. As concern over the state of other
workplaces in the developing world became an increasing concern in the media, Miss Lui
wrote a letter to the board of Cheapkit, which she also sent to newspapers and other media.
Many of the newspapers and television channels reproduced the letter and it became a
talking point in many countries because of the issues it raised.

In the letter, she said that Cheapkit was an unethical company because it supplied a market
in its home country which was obsessed with cheap clothes. As long as its customers bought
clothes for a cheap price, she believed that no-one at Cheapkit cared about how they were
produced. She said that the constant pressure on prices had created a culture of ‘exploitative
wages’, including at Cornflower.

Miss Lui received a lot of support after her comments on Cheapkit’s accountability. She said
that large international companies such as Cheapkit needed to recognise they had
accountabilities to many beyond their shareholders and they also had a wider fiduciary duty

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in the public interest. The defective Cornflower factory in Athland, she argued, would not
have existed without demand from Cheapkit, and so Cheapkit had to recognise that it should
account for its actions and recognise its fiduciary duties to its supply chain as well as its
shareholders.

At the same time as events in Athland unfolded, the business journalists reporting on the
events and Cheapkit’s alleged complicity in the tragedy also became aware of a new
innovation in business reporting called integrated reporting, an initiative of the International
Integrated Reporting Council (IIRC). Jess Lui read one article which said that integrated
reporting might increase an organisation’s accountability and require it to account for a wider
set of concerns than was traditionally the case. This new understanding led to her including
the following comment in her letter to Cheapkit: ‘… as the leader of the PWR, it is always in
my interests to gain as much information as possible from Cornflower and the other
businesses with which it transacts, including, in this case, Cheapkit. Perhaps the integrated
reporting initiative offers the advantage of a wider reporting model for businesses, to include
accountability for a much more diverse set of concerns than has been the case in the past.
The integrated reporting model appears to substantially enhance the existing business model
and it would be in the interests of broader accountability if Cheapkit, and other businesses in
the garment supply chain, were to adopt this new reporting approach. Anything that requires
businesses to report on their wider impacts on society and the environment is a good thing
as far as social pressure groups like PWR are concerned.’

The board of Cheapkit discussed the issues raised by the well-publicised discussion of Miss
Lui’s open letter and the comments from business journalists about integrated reporting. The
board was, in principle, a supporter of the integrated reporting initiative and thought it would
be useful to explain its position on a range of issues in a press release.

Required:
(a) You have been hired as a consultant to prepare a report to the Business Manager which
addresses the following:
i. Discuss the stakeholder claims of Cornflower’s employees and customers, and
how these claims may be in conflict. (6 marks)
Professional skills marks are available for demonstrating evaluation skills in
assessing the stakeholders’ claims and how the claims are in conflict. (2 marks)

ii. Discuss how corruption at Cornflower contributed to the collapse of the building
and the loss of life. (8 marks)
Professional skills marks are available for demonstrating communication skills in
clarifying how corruption led to the collapse of the building. (2 marks)

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 iii. Cheapkit’s board believed that its major risks were exchange rate risk, supply risk
and international political risk.
Explain each of these risks and how each may be of importance to Cheapkit’s
shareholders. (9 marks)
Professional skills marks are available for demonstrating analysis skills in
considering how each of the risks affects the company. (2 marks)

(b) The board of Cheapkit felt that the reputation of the company had been damaged
following publication of Jess Lui’s letter. It was decided that it should make a public
response to her comments and also respond to points about integrated reporting raised
by the business journalists, both of which had received a lot of supportive comment in
the media.

Required:
As the consultant, draft a press statement for the board of Cheapkit to include the following
content:

i. An explanation of Cheapkit’s role as a ‘corporate citizen’ given its international

supply chain. (4 marks)

ii. An explanation of ‘accountability’ and ‘fiduciary duty’ as used in the case, and a
discussion of how these are relevant to Cheapkit as a company keen on
maximising shareholder wealth. (7 marks)

iii. Explain the potential benefits to Cheapkit’s different stakeholders of reporting

on different capital types in the integrated reporting framework. (6 marks)

Professional skills marks are available for demonstrating communication skills in clarifying the
matters to be addressed in the press statement. (4 marks)

(50 marks)

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2 MFP (Mutual Farm Products) was formed in 1910 as a co-operative shop network owned by
farmers in the country of Arboria. It progressively opened small shops across the country
selling products produced by Arborian farmers. Over time its expanding network of shops
began to offer non-farming products from a wide range of suppliers, but it has remained true
to its co-operative roots. All employees are shareholders and receive annual dividends.
Customers can also become shareholders and are rewarded with dividends which reflect the
value of their spending in the shops. An increasing number of customers are becoming
shareholders, reflecting a renewed interest in the country in mutual organisations, such as
co-operatives. MFP only operates in Arboria and it has no plans to expand overseas. Arboria
itself is a wealthy, industrialised country which continues to grow.
Supermarkets in Arboria
When supermarkets were first introduced in Arboria, MFP reflected this trend by opening its
own supermarkets. However, its supermarkets tended to be (and continue to be) smaller than
its well-known competitors and its network of smaller shops was largely retained. In contrast,
other supermarkets focused on developing large out-of-town sites serving a large catchment
population. In the top-ten supermarkets of Arboria, only MFP has, in addition, a network of
smaller shops.
In 2012 MFP was the eighth largest shop and supermarket chain in Arboria. It reported
revenues of $10bn, compared to the $40·5bn revenue of the market leader, HypCo. By 2016,
MFP was the ninth largest shop and supermarket chain in the country, with revenues of
$11bn, compared with HypCo’s $45bn. During this period, two new supermarket chains have
entered the Arborian market. These two new entrants, Super24/7 and Letto, already have a
combined revenue of $50bn and are fourth and eighth respectively in the top ten Arborian
supermarket chains. Both of these companies are overseas-based supermarkets operating a
no-frills approach to retailing. Overall, the revenue of the top ten supermarket chains has
increased from $300bn to $350bn in the last five years.
Margins in the sector are always under pressure and the large supermarkets continue to
aggressively market their goods, highlighting price savings. They also provide customer
incentives, such as loyalty cards and account discount schemes in an attempt to retain
customers. For many products and services, price comparison websites show consumers the
prices charged by competing supermarkets.
With the exception of MFP, all supermarkets are quoted companies with their shares largely
owned by institutional investors who look for significant dividends and capital appreciation.
MFP is the only co-operative in the top ten Arborian supermarket chains. Generally, suppliers
to supermarkets are relatively small companies. Supermarkets’ control of consumer spending
is so great that many suppliers aggressively compete to have their products stocked by the
supermarket chains.
MFP has continued to promote and follow its ethical principles. It ensures that new shops and
supermarkets are energy efficient. It also continues to pay its employees significantly more
than its competitors. This concern for its employees’ welfare appears to lead to excellent

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 customer service performance. For example, in a recent independent survey of supermarket
customers, MFP was ranked first for personal customer service.
There is some evidence that people in Arboria are becoming disillusioned with their
supermarkets and this is reflected in Appendix A, an extract from an article by the journalist
Liz Bones in the influential daily newspaper, Arbor Today. Appendix B is an extract from an
information sheet issued by the government to companies trading in Arboria.
Management at MFP
Management at MFP is aware that the company has certain weaknesses. For example, it
acknowledges that it needs to streamline its supply chain and achieve cost savings. It also
recognises that it has failed to exploit technological advances in product control, movement
and storage.
However, before making changes, the management wishes to better understand the strategic
position of MFP and the models used to assess this position. They have hired you, Dennis
Lillee, an experienced business consultant and have asked you for a report which includes:
– An analysis which identifies macro-environmental opportunities and threats from a political,
sociocultural, environmental and legal perspective.

– An analysis of the market place.

Appendix A: Have Arborians fallen out of love with the supermarket? By Liz Bones
For many years, the trend towards supermarket shopping has seemed unstoppable. The high
streets of our towns have become increasingly deserted as grocers, butchers, toy shops and
bookshops have disappeared under the combined onslaught of online retailers and expanding
supermarkets. For example, ten years ago in the high street of Milton Magna there were three
grocers, four butchers, two toy shops, one bookshop and only two supermarkets. Now, only
one grocer and one butcher survive on the high street and both supermarkets have moved to
out-of-town locations. In fact, there are now five out-of-town supermarkets serving the
people of Milton Magna.
However, there is increased evidence that shoppers are becoming disillusioned with
supermarkets and yearn to return to the days when shops were smaller and service more
personal.
Fiona McLean, of the department of sociology MidShire University, says that, ‘our research
suggests that there is a significant number of consumers, commonly called green consumers,
who are increasingly concerned about the environmental impact of food and other products
that they are purchasing. This is not only in terms of the excessive and elaborate packaging of
the goods, but also in terms of the ‘food miles’ that the product has travelled before it reaches
the shelves of the shop or supermarket.’
In general, these green consumers have higher than average disposable income and they are
prepared to pay a price premium for products which have been ethically sourced. Fiona also
suggested that such consumers are part of a group who are increasingly angered by what they
consider as the excessive profits of the large supermarket chains, the high remuneration

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packages paid to senior management and the large dividends paid to their institutional
shareholders. ‘There is a feeling that supermarkets are run by fat-cat managers, exploiting
small suppliers to reduce costs to create a margin for dividends that pacify demanding
institutional investors’, she said.
Even the newer entrants, Super24/7 and Letto, are under threat. There is a consumer reaction
against these overseas-based supermarkets which have followed a low-cost, no frills
approach, with shelves stacked intensively with low priced products and where customer
service is both impersonal and kept to a minimum. The low wages paid to staff in these
supermarkets is also an issue for the green consumer.
So, perhaps Arboria is on the brink of a supermarket revolution! Television personalities such
as Alexis Piazzio urge us to ‘think local’ and ‘shop local’. Perhaps after all, small is beautiful
when it comes to shopping!!!
Appendix B: Arborian government information sheet 4560 (extract)
Disability legislation (The Access Act)
The recent extension of disability access legislation requires shops and supermarkets to help
all disabled customers to access all shelf areas within the store. The previous legislation just
required shops and supermarkets to provide disability access to the store areas. However,
many disabled customers found that goods were out of reach when they were actually in the
store. This extension to the legislation addresses this issue. So, for example, all products held
within the store must be reachable for a person who is in a wheelchair and, if not, a store
attendant must help. Failure to adhere to this legislation will lead to a fine of up to $1,000 per
incident.
Pension reform
The new government recognises that the current state funded schemes will lead to a
significant pension shortfall in the future. Consequently, it has declared its intentions to make
it mandatory for employees to pay 5% of their gross pay into a pension scheme of their choice.
The amount paid in will be matched by that paid in by the employer. So, for example, an
employee earning $10,000 per year will pay $500 per year into his or her pension fund and
the employer will also be required to pay $500 per year into the same fund. It proposes that
the employer will be responsible for ensuring that pension payments are correctly made into
government authorised schemes and to accurately process these payments, through
automatic payroll deductions, every month. These proposals for pension reform are currently
under discussion.
Note: Requirements are on the next page

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 Required:
Write the report required by MFP management which:

(a) Analyses external factors from the political, sociocultural, environmental and legal
perspectives. The analysis should include an assessment of the likely effect of such factors
in the context of the strengths and weaknesses of MFP. (12 marks)
Professional skills marks are available for demonstrating analysis skills in considering the
macro-environmental forces in the context of MFP’s strengths and weaknesses. (3 marks)

(b) Analyses the market place (industry), assessing its implications for MFP. (12 marks)
Professional skills marks are available for demonstrating analysis skills in considering the
market forces that affect MFP. (3 marks)

(30 marks)

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3 The National Museum (NM) was established in 1857 to house collections of art, textiles and
metalware for the nation. It remains in its original building which is itself of architectural
importance.

Forty years ago, the government identified museums that held significant Heritage Collections
(HCs). These are collections that are deemed to be very significant to the country. Three
Heritage Collections were identified at the NM, a figure that has risen to seven in the
intervening years as the museum has acquired new items.

Funding and structure

The NM is currently 95% funded by direct grants from government. The rest of its income
comes from a nominal admission charge and from private sponsorship of exhibitions. The
direct funding from the government is based on a number of factors, but the number of
Heritage Collections held by the museum is a significant funding influence. The Board of
Trustees of the NM divide the museum’s income between departments roughly on the basis
of the previous year’s budget plus an inflation percentage. The division of money between
departments is heavily influenced by the Heritage Collections. Departments with Heritage
Collections tend to be allocated a larger budget. The budgets for 2020 and 2021 are shown in
Figure 1.

The head of each collection section is an important position and enjoys many privileges,
including a large office, a special section heads’ dining room and a dedicated personal
assistant (PA). The heads of sections which have ‘Heritage Collections’ also hold the title of
professor from the National University.

The Director of Art and Architecture and the two professors who hold the Head of
Architecture and Head of Art posts have, in the past, successfully lobbied individual members
of the Board of Trustees with their concerns. The Director of Industrial Arts and the Director
of Media and Contemporary Art have also circumvented the former Director General and
directly contacted powerful figures in the Board of Trustees, television and the press to voice
their concerns. There have been, in the past, television programmes featuring interviews with
various heads of collections criticising changes proposed by the government.

The departmental structure of the NM (see Figure 2) is largely built around the twelve main
sections of the collection. These sections are grouped into three departments, each of which
has a Director. The Board of Directors is made up of the three directors of these departments,
together with the Director of Administration and the Director General. The museum is a
charity run by a Board of Trustees. There are currently eight trustees, two of whom have been
recently appointed by the government. The other six trustees are people well-known and
respected in academic fields relevant to the museum’s collections.
Government change
One year ago, a new national government was elected. The newly appointed Minister for
Culture implemented the government’s election manifesto commitment to make museums

9
more self-funding. The minister has declared that in five years’ time the museum must cover
80% of its costs on its own and only 20% will be directly funded by government. This change
in funding will gradually be phased in over the next five years. The 20% government grant will
be linked to the museum achieving specified targets for disability access, social inclusion and
electronic commerce and access. The government is committed to increasing museum
attendance by lower socio-economic classes and younger people so that they are more aware
of their heritage. Furthermore, it also wishes to give increasing access to museum exhibits to
disabled people who cannot physically visit the museum site. The government have asked all
museums to produce a strategy document showing how they intend to meet these financial,
accessibility and technological objectives. The opposition party has, since the election, also
agreed that the reliance of museums on government funding should be reduced significantly.

Collection sections Number of HCs Budget ($000s) Budget ($000s)

2020 2021

Art 2 135·00 140·00

Metalwork 1 37·50 39·00

Glass 23·00 24·00

Textiles 1 45·00 47.50

Ceramics 35·00 36·00

Furniture 30·00 31·50

Books 35·00 36·50

Photography 15·00 15·50

Fashion 10·00 10·50

Jewellery 1 50·00 52·50

Sculpture 25·00 26·00

Administration 60·50 63·00

Total 621·00 647·00

Traditionally, the NM has provided administrative support for sections and departments,
grouped together beneath a Director of Administration. The role of the Director General has
been a part-time post. However, the funding changes introduced by the government and the
need to produce a strategy document, has spurred the Board of Trustees to appoint a full-
time Director General from the private sector. The trustees felt they needed private industry
expertise to develop and implement a strategy to achieve the government’s objectives. The
new Director General was previously the CEO of a major chain of supermarkets.

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Employees have reacted furiously to the government’s proposal. The idea of linking budgets
to visitor numbers has been greeted with dismay by the Director of Art and Architecture. ‘This
is a dreadful idea and confuses popularity with historical significance. As previous
governments have realised, what is important is the value of the collection. Heritage
Collections recognise this significance by putting the nation’s interests before those of an
undiscerning public. As far as I am concerned, if they want to see fashion, they can look in the
high street shops. Unlike fashion, great art and architecture remains.’

However, the new Director-General intends to make some significant changes within the
museum in order to increase revenue and reduce costs. Some section directors and heads
have caught whiff of his intentions. Although they were not clear of his proposals, a recent
television programme featured interviews with various heads of collections criticising his
intentions. They were particularly critical of the lack of consultation; ‘we are aware that
certain strategies are being considered by the ex-grocer with no input from museum staff’,
said one anonymous contributor. The Director of Art and Architecture and the two professors
who hold the Head of Architecture and Head of Art posts have also lobbied individual
members of the Board of Trustees with their concerns about the Director General’s proposals.

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 Board of Trustees

Head of Metalwork

Personnel

Visitor numbers have been declining (see Figure 3) since 2017.

Visitor numbers (000s) 2020 2019 2018 2017

Age 17 or less 10 12 15 15

Age 18–22 5 8 12 10

Age 23–30 10 15 20 20

Age 31–45 20 20 18 25

Age 46–59 35 35 30 30

Age 60 or more 40 35 35 30

Total 120 125 130 130

Figure 3: Visitor numbers 2017-20

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Required:

The new Director-General has appointed you as a consultant.

Prepare a report for the new Director-General that analyses the current culture of NM and
an assesses how the culture may need to be changed to align with the aims of the
government. (16 marks)
Professional skills marks are available for demonstrating evaluation skills in assessing the
implications of the changes needed in relation to the future culture of NM. (4 marks)

(20 marks)

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