CMA MAY-2023 EXAMINATION

STRATEGIC LEVEL
SUBJECT: ENTERPRISE STRATEGY

Model Solution
Slution of the Question No. 1

(g) State the growing importance of non- market strategy:

In many markets it is now increasing difficult to achieve a sustainable competitive advantage:
- It is harder to come up with products that are different enough to protect market
share.
- ‘Excellence’ is 30 years old concept.
- Most companies have’’ squeezed ‘’ cost to maximize profits.
Non market matters, such as reputation, the ability to work with NGOs, the capability to foresee
relevant government actions and even to shape policy – these are the factors that can make a
difference, even though many firms have no clear strategy in this respect.
(h) Methods available would include:
• Penetration pricing - pricing at a level below the competition;
• Promotional campaigns - advertising, PR etc;
• Place – finding new stockists, distribution channels within the existing marketplace;
• Product – slight modifications or upgrades to the extent that it does not become a “new”

Slution of the Question No. 2

(a)
SHI is faced with a dynamic and rapidly changing environment in the North American market.
Scenario planning would therefore enable SHI to calculate and examine various possible
outcomes.
For example, SHI would be able to examine the possible impact of the economic downturn
lasting for several years, or alternatively beginning to reverse immediately. It could also
compare combinations of events, such as:
- The sales of the division, followed by an economic recovery, but the loss of the EMI
order.
- The retention of the division, followed by a continuation of the economic downturn,
along with the acquisition of the EMI order and so on.
This approach will have two key benefits:
1) It will help the directors of SHI to see ‘worst –case ‘scenarios. Should the North American
economy suffer a prolonged downturn and the division loss the EMI order, there could be a
significant impact on the division, along with the rest of the company. This may help the
directors to decide how much of a risk maintaining the North American division is and
whether it would be best to sell immediately.
2) Scenario planning will also help the directors to anticipate potential problems with, or
opportunities from, the North American division. For example, if SHI waits to sell the division
and the EMI order is lost, the price it achieves from the sale may well be much lower than is
currently on offer. Alternatively the market may recover in the near future and the sale of the
division now may compromise SHI’s future growth prospects.
(b)1. Main external factors would include:
i) Rival Cost and Accounting firms seeking to take clients themselves.
ii) Other professional practices which may direct work towards Cost and Management Accounting Practices.
iii) Regulations such as Cost Accounting standards, Accounting standards, Audit standards and Tax laws.
iv) The labor market for post qualified and qualified accountants.
v) The general state of the economy and its effect on business.
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2.Main environmental external factors affect the strategy of professional Cost and Management
Accounting practice in Bangladesh:
i) Political
ii) Economy
iii) Law and regulations
iv) Culture and tradition
v) Technology
vi) Physical

(C - I)

Current present value

Year Cash flow Discount factor Discounted cash flows
$000 $000 $000
0 Investment (20,000) 1.000 (20,000)
1-3 Net cash flows 11,000 2.577 28,347
8,347
Therefore net cash flows must reduce by 8,347/28,347 = 29.4%.
Alternative working: Annual net cash flows at breakeven = 20,000/2.577 = $7,761 Reduction in
sales receipts = (11,000 – 7,761)/11,000 = 29.4%.
(C- II)
The correct answers are 1, 4 and 5 : -
 The manager of Division B has an incentive to invest in the new machine which would be
against the interest of shareholders
 The managerial bonus system is rewarding poor performance by the manager of Division B
 ROI is an unsuitable measure for evaluating new investments.
The forecast ROI for the new machine means that the manager of A will reject the proposal as it
lowers the ROI of the division, despite being NPV positive and hence in the best interests of
shareholders. Conversely the manager of B will accept the proposal despite, the negative NPV, as
the higher ROI will yield a bonus. As such ROI is an unsuitable measure here as it leads to
dysfunctional outcomes.

(d)
I) How change agent helps an organization:
 Define the problem and its clause
 Diagnose solutions and select appropriate courses of action
 Implement change
 Transmission the learning process to others and the organization.
II) What does the change leader do?
The change leader is responsible for articulating what change is needed and why, acting as a
figurehead for the change process, as well as helping to deal with any problem or conflicts that
arise during the change process.
III) Kotter’s eight step process of change leadership:
 Establish a sense of urgency
 Creating the guiding coalition
 Developing a change vision
 Communication the vision
 Empowering broad – based action
 Generating short term wins
 Never letting up
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  Incorporating changes into the culture

(e) Required No-(i) Callaway Sports

Computation of ROI of Golf Technology: Amount(tk)
Selling price of AccuDriver per unit is ..… 1,600
Variable cost per unit is ………………………………………. 1,200
Contribution margin per unit 400

Operating income:
1,70,000 Accudriver @ tk.400 68,000,000
Less fixed costs…………………………………… 52,000,000
16,000,000
ROI = Operating Income /Investment
= tk.16,000,000X100/92,000,000…………………… 17.39%
ii) Minimum selling price to be charged per AccuDriverclub to achieve an ROI of 25% from the
division.
We know Operating Income = ROI X Investment
Number of AccuDriver sold(Selling price per unit-Variable cost per unit)-Fixed cost=ROI X Investment
Assume X=Minimum selling price per AccuDeriver to achieve a 25% ROI
Then 1,70,000 AccuDriver(X-1,200)-52,000,000=25%(tk.92,000,000)
tk.1,70,000 X –tk.204,000,000-52,000,000=tk.23,000,000
tk.170,000 X= tk.23,000,000+tk.204,000,000+tk.52,000,000
tk.170,000 X=tk.279,000,000, so X= tk.279,000,000/tk.170,000
=tk.1,641.18
iii) Minimum selling price to be charged per AccuDriver club if company rate of return is 20%.
Assume Tk.Y=minimum selling price per unit to achieve a 20% rate of return.
Then, 170,000 AccueDriver (tk. Y-tk.1,200)-tk.52,000,000) =20% (tk.92,000,000)
170,000 Y-tk.204,000,000-tk.52,000,000=tk.18,400,000
So, 170,000Y=tk.18,400,000+tk.204,000,000+tk.52,000,000
Y=tk.274,400,000/170,000= Tk.1,614.12

Slution of the Question No. 3

RFL Company
Performance evaluation of John Henry
It would appear from the presented data that Henry John has achieved much in his first year as divisional
manager. Return on capital has risen by nearly 10%, previous year and is well up on budget. The growth in
the net profit seen under Robert Brown’s management has been sustained under Henry John and the
division’s net profit percentage has cleared 50%.
Henry John’s performance looks less spectacular, in particular with respect to the following points.
i) Sales are down on budget tk.800,000 or 10% on budget and chances of achieving the 2022 budget seem
remote.
ii) Repair costs are down but other variable cost has maintained their normal relation to sales but repair cost
has dropped off.
iii) Discretionary fixed costs are below budget, previous commitments to staff training, advertising and
maintenance have been cut by 25% to 50%.
iv) Depreciation is below budget.
v) Non-current assets are tk.1.2 million below budget, Capital investment programs have not been carried
out.
vi) Receivables and inventory level are down on budget. The first could be attributable to the level of sales,
the later to efficient working capital management, though there could be problems of meeting future sales.
vii) Payables have increased dramatically, this could be called good credit management or perhaps an
attempt to manipulate figures used for divisional assessment.

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From above items (ii) and (vii) are controllable by Henry John, have moved in such a way as to improve the
division’s reported return on capital employed. However, in the case of most of the controllable items, they
could be said to have changed in a way that has improved short term profitability whilst seriously
jeopardizing long term performance. The fall in repair cost, training and maintenance must put a question
mark over whether the division can continue to be run efficiently. The cuts in non-current assets, inventory
and advertising make it unlikely that sales will be maintained even at their current level.
Required No-b)Suggestion for changes in responsibility and evaluation:
The responsibilities that appear to have been assigned to Henry John particularly the responsibilities for
reproducing regular budgets, are in line with what one would expect of a divisional manager, some changes
need to be implemented.
i)There is a need for manager’s budgets to be more critically reviewed. Questions should be asked as to
how certain budgetary targets can be attained.
ii)Divisional managers must be fully committed to any capital investment programmers following joint
discussions with the finance committee.
More improvements, however can be made in the method of appraising divisional performance.
i)The extent to which a division might contribute towards the company’s profit would be better measured by
residual income.
ii)Subsidiary ratios should be used such as asset/turnover, Gross profit percentage, Inventory, receivable
and payables periods-though these may be open to the sort of “window dressing” carried out by Henry John.
iii)Other performance measures could be introduced to establish whether discretionary costs have been cut
back too far as for example machine down time and staff turnover ratio’s.
iv)Using a balanced scorecard approach would involve assessing success from a financial, customer,
innovation and learning and internal business perspective. Other useful measures might then include market
share, dissatisfied customer orders, number of new products launched.
The important steps are to change the main evaluation measure used and to support it with other measures
that aim to examine every facet of performance.
Required No-c) Possible reasons for and disadvantages of decentralization.
Reasons why RFL Industries might wish to be organized along divisional lines might include the following.
i) Size-It is useful to split a large organization into smaller manageable units.
ii)Specialization and Complexity-Central management may not have sufficient skills to responsible for the
day to day control of certain specialized tasks.
iii) Uncertainty and unpredictability- In uncertain trading conditions local management will be able to react
to changes more quickly than central management.
iv) Motivation-By assessing responsibility for a section of the business to one division manager, that
manager might be encouraged to ensure that the division’s performance is enhanced. The division also
presents the manager with a degree of independence and acts as a training ground for him to develop his
management skills.
v) Economic-A geographical separation of divisions might allow advantage to be taken of local investment
grants and favorable tax rates.
vi) Freeing central Management-Being released from day to day responsibilities for some operations of the
business allows central management to concentrate more on longer-term strategic planning and control.
Possible disadvantages of such a corporate structure:
Though above may be valid reasons for a firm decentralizing, there are certain disadvantages of such policy
which is as follows:
i) Interdependencies-Complete separation of division is probably impossible, since divisions may be
engaged in supplying each other with goods or services or selling complementary or substitute products.
Each makes demands on centralized resources, especially cash.
ii) Cost-The advantages gained from economics of scale may well be lost by decentralization, with divisions
each requiring certain types of assets or other resources which might otherwise be shared.
iii) Loss of goal Congruence-Divisional managers may take decisions which, whilst in the best interest of
their own division, are not in the best interest of the organization as a whole.
iv) Loss of Control-Central management will need to learn to delegate responsibility, co-ordinate divisional
activities and control their performance.

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Slution of the Question No. 4
Division A
Division A appears to be making a relatively small change to its business. It is currently highly
profitable – indicating that it is not currently experiencing a crisis.
As such education and communication may be the best approach. This involves explaining the
reasons behind the proposed centralization of the accounting function and attempts to persuade
the employees that this is a beneficial idea. While this is often time consuming, A has a relatively
small number of staff, which makes this approach more realistic. In addition, as the company
currently has a good relationship with its workers, this approach is most likely to keep the majority
of staff happy.
It is possible that staff may not be convinced by the need to cut costs given that the division is
highly profitable. In this case A could choose facilitation and support. – perhaps helping the staff
who will be made redundant to find new jobs , such as by giving them time off for job interviews.
Finally, A could consider participation and involvement. This would see A getting its employees
involved in the change process. Perhaps jobs losses can be avoided if employees are able to think
of alternatives ways of improving efficiency. This may be very time consuming, although there is
no evidence of time pressure in the scenario.
Division B
Division B is clearly in a crisis, with poor industrial relations and the potential threat of closure.
Given the serious nature of its situation, B could also adopt an education and communication style.
If the alternative to job losses is a total closure of the division, this may be enough to convince
employees of the need for the change. However, given the poor relations between staff and
managers, as well as the tight time constraints that B is under, this may not be realistic.
As an alternative, B could choose a manipulation and co- potation style. This involves undermining
resistance in a more covert manner, perhaps by stressing the potential for the division to be
closed, or down – playing the number of job losses that would be involved. It is a faster way of
dealing with resistance than education and communication, but if employees feel that they are
being manipulated, it may damage industrial relations further.
Finally B could opt for coercion. This involves the managers of B forcing the staff to accept the
changes. Any individuals who resist can be threatened with redundancy. Given the urgent nature
of the needed change, this may be the easiest and most effective way of dealing with resistance.
However, it will be likely to leave employees angry and may lead to demotivation and high
employee turnover.
B may decide that its industrial relations are less important than its long term survival, especially
as employees are skilled and will therefore be easy to replace.

= THE END =

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