May 2016 Professional Examination Corporate Strategy, Ethics


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MAY 2016 PROFESSIONAL EXAMINATION CORPORATE STRATEGY, ETHICS & GOVERNANCE (2.6) EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME
EXAMINER’S REPORT STANDARD OF THE PAPER The standard of the paper was good. It compares favourably with those of November, 2015. Candidates were required to attempt the case question and any other three questions. There were no ambiguities, typographical or other errors in the paper. The marks allocation was fair and marks were allocated to each sub-question. All the questions were within the scope of the syllabus. PERFORMANCE OF THE CANDIDATES Overall, the performance of candidates in the May 2016 was slightly better. However, a good number of the candidates performed poorly because they did not prepare very well for the examination. Part of the reason for the poor performances may be due to the policy that allow candidates to write across levels. STRENGTHS OF CANDIDATES The main strength was that almost all the candidates attempted the required number of questions. WEAKNESSES DEMONSTRATED BY CANDIDATE Some of the candidates demonstrated lack of knowledge of the subject matter. Also, some of them provided incorrect responses to questions. It is worrisome that some of the candidates could not prepare cash budget.
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CORPORATE STRATEGY, ETHICS & GOVERNANCE QUESTIONS
QUESTION ONE - Case Study
RICHWARD LIMITED
Background Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.
Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.
In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.
Acquisition of land One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the
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installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.
Accounting Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.
Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.
The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.
One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.
In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.
Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.
Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.
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Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.
The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).

Required: a) Assess the nature of competitive forces of Richward Ltd.

(8 marks)

b) Present a SWOT Analysis for Richward Ltd.

(8 marks)

c) Advise Mr. Bonku on the strategic management accounting information which should be provided to assist future decision making and cost control. (8 marks)

d) Prepare a cash budget for Richward Ltd Limited for the six months ending 30th November 2016, showing the planned cash position at the end of each month; on the basis of the original planned credit and inventory holding periods. (6 marks)

e) Redraft your cash budget to reflect the suggested alterations to these planned

periods.

(5 marks)

f) Suggest what other aspects Richward Ltd Limited should consider to solve the expected cash flow problem, should the suggested solution be unachievable. (5marks)

(Total: 40marks)

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QUESTION TWO

a) The Balanced Scorecard approach has been embraced as an effective model for generating information to assist management in formulating and achieving strategic policies. It emphasizes the need to provide management of an organisation with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion.

You are the Management Accountant of McGinate Incorporated, a local printing and publishing house located in the regional capital of Ashanti. Your CEO has asked you to brief him further on the balanced scorecard approach.

Required: In a memo to the CEO: i) Describe FOUR perspectives of a balanced scorecard.

(8 marks)

ii) Explain THREE problems usually associated with the use of this approach for

strategic management.

(6 marks)

b) Management by objectives (MBO) is a process of defining objectives within an organisation so that management and employees agree to the objectives and understand what they need to do in the organisation in order to achieve them. The essence of MBO is participative goal setting. In order for MBO to work effectively in an organisation, objectives agreed on must possess certain inherent characteristics.

Required:

Identify and explain THREE of these inherent characteristics and how they

facilitate Management by objectives (MBO).

(6 marks)

(Total: 20 marks)

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QUESTION THREE

a) Strategy evaluation is a key aspect of the strategic management process. It allows management to assess the efficiency and effectiveness of the chosen strategies before their implementation.

Required:

Discuss the following criteria for evaluating corporate strategic options.

i) Suitability

ii) Acceptability

iii) Feasibility

(12 marks)

b) Management perception about the global environment is an important factor in shaping its orientation or philosophy in developing a general strategic profile in the international arena.

Required:

Identify and explain FOUR management orientations in the management of

international business.

(8 marks)

(Total: 20 marks)

QUESTION FOUR

a) During strategy implementation, important management issues need to be reviewed for their appropriateness for the new strategy. Many organisations fail to achieve their strategic objectives not because they do not develop the right strategies but because many issues are not resolved during the implementation. They may not have the right organizational structure, a fitting culture, an efficient leadership while communication may be poor.

Required: Discuss the importance of each of the following in successful strategy implementation:

i) Effective communication ii) Strategic leadership

(5 marks) (5 marks)

b) You have been consulted by the CEO of Infinity Graphix, a designing and publishing company, to clarify some strategic management terminologies to aid him to finish a proposal for consideration by the company’s board of directors.

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Required:

Using relevant examples, explain the following types of modular organisation

structures.

i) Outsourcing.

ii) Offshoring.

iii) Shared servicing.

(6 marks)

c) Explain TWO limitations that are associated with offshoring.

(4 marks)

(Total: 20 marks)

QUESTION FIVE

a) You have recently been appointed head of corporate affairs of a reputable company that operates in the upstream sector of the petroleum industry in Ghana. In a recent management meeting, a disagreement arose among executives regarding the nature of the company’s philosophy and strategy towards social responsibility. In order to resolve the disagreement, you have been asked by the company’s board of directors to submit a position paper that will enable it to formulate an appropriate corporate social responsibility strategy for the company.

Required:

In a brief report to the board, make a clear case for Corporate Social

Responsibility (CSR) to help your company’s board formulate an appropriate

CSR strategy.

(10 marks)

b) Explain TWO strategies your company could adopt for managing its social

responsibility.

(4 marks)

c) You recently qualified as a professional accountant and received promotion in your company. One of your key responsibilities is to prepare management accounts to facilitate management decision making. You require important sales information from the sales department to incorporate into the final figures. Unfortunately, due to staff sickness and other inefficiencies, the sales report for the month has been delayed. Thus, you will not receive the information until few hours before the accounts are due for presentation to the Chief Finance Officer.

In a related situation, while on lunch break, you overhead the marketing manager asking another employee in the finance department to advise her on some investment decisions she has to make. She has recently inherited a

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considerable sum of money and would like your colleague to calculate her inheritance tax as well as capital gains tax liabilities.

Required:

Identify the fundamental ethical principle(s) that could be in breach and justify

why they may constitute a breach.

(6 marks)

(Total: 20 marks)

QUESTION SIX

a) You are the Chief Operations Officer and a member of the board of directors of a reputable firm that has operations in all ten regions of Ghana. The board is currently deliberating on a strategy to decentralize the administrative function in order to promote flexibility in administration across all the operational areas of the company. You feel strongly that this move will be detrimental to the prospects of the company and has therefore spoken against it. The Chairman of the board has, therefore, asked you to submit a short memo to argue out your position.

Required:

In a memo to the Chairman of the board, explain THREE reasons why you

believe your company should maintain the current centralised administrative

department.

(6 marks)

b) One of the important tasks in the formulation of corporate strategy is stakeholders’ analysis.

Required: Explain the term stakeholders and identify TWO groupings of stakeholders.
(4 marks) c) A new entrant into an industry will bring extra capacity and more competition
and so could, in turn drive down profits. The strength of the threat posed by new entrants is likely to vary from one industry to another and depends on the strength of the barriers to entry and the likely response of existing competitors to the new entrant.

Required:

Identify and explain FIVE determinants of barriers to entry to new entrants into

an industry.

(10 marks)

(Total: 20 marks)

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CORPORATE STRATEGY, ETHICS & GOVERNANCE SCHEME
QUESTION ONE
a) The five competitive forces related to the business of Richward Ltd care:
1. Rivalry amongst existing competitors Richward Ltd faces strong competition for haulage contract work and it appears that there are several firms operating in the market. Profit margins are low, which indicates that work is undertaken at low prices. A major customer, Grace Ltd, uses other haulers, which suggests that competition for business is fierce. Richward Ltd is facing strong competition from existing competitors. The strong nature of competition is also exacerbated by low switching costs of customers.
2. Threat of a new market entrant The main constraints on setting up a road haulage business will be obtaining a license and having sufficient capital to purchase or lease a tractor unit and trailer. Finance for such an operation will be readily available. The only other significant entry barrier might be low profit margins. It appears that, overall, the road haulage industry has few major entry barriers so this will always be a threat to established business such as Richward Ltd.
Note: Any of the points under barriers to entry that is well explained may considered – capital requirements, low switching costs of customers, degree of differentiation, economies of scale, knowledge requirements, etc.
3. The power of customers The customer of Richward Ltd will be primary organisations that employ skilled people who know the road haulage industry and how to negotiate contracts. As there are many competing businesses in the trade, this puts the customers in a strong bargaining position. This is shown by the fact that Richward Ltd’s major customer Grace is using other hauliers and is, no doubt, assessing its supplier’s prices and performance. The power of customers in the market is strong; this poses a serious threat to Richward Ltd.
Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.
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4. Power of suppliers The main suppliers to Richward Ltdwill provide vehicles, other plan and equipment, formal services and labour. It is unlikely that any supplier is in a strong monopolistic situation, except possible providers of capital. Richward Ltdis in an established position and while it remains profitable will probably be able to obtain reasonable amounts of capital. The power of suppliers does not appear to be very strong.
5. The threat of a substitute product The main substitute for road haulage services is freight carried by the railway industry. The current dire state of this industry means that rail freight cannot be considered a serious threat to Richward Ltd.
Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.
Overall, Richward Ltd’s competitive position is not strong as it faces a number of competitive threats.
1.5 marks for each well explained point and 0.5 for conclusion [8marks]
b) SWOT Analysis for Richward Ltd.
Strength  Richward Ltdis an established business with an experienced management team  Bonku lives on site enabling Richward Ltdto offer a 24-hour service to customers  The company acquired a lease on a new site that has quite a lot of potential  The company has diversified into truck driver training which reduced dependence on read haulage for income.  Replacement of old trucks and other equipment. This increases the efficiency of operations.
Weaknesses  Richward Ltd’s existing site is too small, so it will have to locate the new site that requires more capital and will disrupt business operations.  Richward Ltd currently does not have an effective management accounting system, which means Richward Ltd’s managers make decision without having sufficient information
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May 2016 Professional Examination Corporate Strategy, Ethics