p6 May 2009

May 2009 Examinations
Strategic Level
Paper P6 Management Accounting Business Strategy
Question Paper 2
Examiners Brief Guide to the Paper 18
Examiners Answers 19
The answers published here have been written by the Examiner and should provide a helpful
guide for both tutors and students.
Published separately on the CIMA website (www.cimaglobal.com/students) from mid-September

is a Post Examination Guide for the paper which provides much valuable and complementary
material including indicative mark information.
The Chartered Institute of Management Accountants. All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recorded
or otherwise, without the written permission of the publisher.
.
Business Management Pillar
Strategic Level Paper
P6 Business Strategy
P6 Management Accounting Business
Strategy
19 May 2009 - Tuesday Morning Session
Instructions to candidates
You are allowed three hours to answer this question paper.
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 open the answer book and start writing or use
your calculator during this 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). The question requirements are contained in a dotted box.
ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be marked.
Answer the ONE compulsory question in Section A on pages 2, 3 and 5. The

question requirements are on page 5, which is detachable for ease of
reference.
Answer TWO of the four questions in Section B on pages 8 to 12.
Maths Tables and Formulae are provided on pages 13 and 14. These pages
are detachable for ease of reference.
The list of verbs as published in the syllabus is given for reference on the
inside back cover of this question paper.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
TURN OVER
2
SECTION A 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER THIS QUESTION
Question One
Introduction
AAA is a large banking group, based in a European country. AAA is stable and financially
sound. It has several hundred local branches, and has a large number of personal and business
customers. A personal customer is a private individual, and a business customer is a
commercial organisation (such as a sole trader, partnership, limited company or not-for-profit
organisation).
The Personal Banking Division of AAA is based at Head Office, and is responsible for
establishing policy and procedures for the way AAA deals with personal banking customers. In
addition to normal bank accounts, the Personal Banking Division also offers customers credit
cards, loans and insurance products. The Business Banking Division offers the same services
to business customers. All branches of AAA deal with both personal and business customers.
The branches are responsible for implementing policies set by the two divisions.
Each branch manager within AAA is responsible for the control of the costs, staff, business and
premises of their branch. The branch manager must comply with the policies and procedures
established by the senior managers of the two divisions. Part of the cost of each Head Office
division is allocated to the branches, in line with activity levels. The branch managers participate
in a bonus scheme, based on the profitability of their branch. Senior managers in each of the
divisions participate in a separate bonus scheme, based on the overall profitability of the Bank.
The Student Account Campaign
For the last three years, the Personal Banking Division of AAA has run a campaign to recruit
university students as account holders. As an incentive, AAA offers student account-holders
free banking while they remain in full-time study. Typically this is for three years. At the end of
the free banking period, student accounts become subject to the normal terms for personal
account holders.
The student account campaign is very unpopular with branch managers, as student accounts
are effectively loss-making for the period during which free banking is offered. This has an
adverse impact on the profitability of the branch, and therefore on the level of performance
bonus earned by the branch manager. This issue has recently become more significant to AAA,
following the resignation of the manager of Branch 32.
A typical student lifecycle
A new student account customer costs 30 to recruit. This cost is an apportionment of central
marketing costs, which is passed on to the branch that opens the account. An additional
administration cost of 20 is incurred in the branch for opening the account. Thus, the total initial
cost is 50.
The student account holders typically pay no bank charges for the first three years. After this
they pay bank charges of an average of 200 each year. The cost in the branch of maintaining
any account is 60 each year. In each year, the bank assumes that the probability of any
customer defecting (that is, closing the account and moving to a competitor) is 20%. Such
defections can be assumed to happen at the beginning of each year, including the first year.
AAA operates at a cost of capital of 10%.
The competitive environment
AAA is one of five major banks in the country. There are also a number of smaller banks, some
of which specialise in either personal or business banking. Each bank offers a wide range of
incentives to attract and keep personal customers. Personal customer defection is quite
common, as they shop around for the best deals. Business customers, however, tend to be
loyal to the bank and branch at which they open their first account.
May 2009 3 P6
Banks recognise that personal customers often require a wide range of add on services, such
as loans, insurance and credit cards. These products can be very lucrative for the bank, so they
are often marketed aggressively to personal customers.
At present, three of the other major banks offer free banking to new student customers for
between one and three years. One of the smaller banks offers three years of free banking to
students and, additionally, gives each new student customer vouchers worth 30 for music
downloads from a major Internet-based music distributor.
Branch 32
Branch 32 of AAA is located on the edge of a small city, only one kilometre from a large
university campus. From 2002 until March 2009, the manager of Branch 32, was Ms A. In each
of the years 2002 to 2005, Ms A received a performance bonus equivalent to about 20% of her
basic salary. In 2006, Ms As bonus was only 8%, and in the last two years she received no
bonus at all as Branch 32 did not achieve the base level of profitability necessary to trigger a
bonus payment.
In February 2009, Ms A attended a regional management meeting, where all the branch
managers in the region met with senior managers from the two divisions to discuss the financial
performance of their branches and business policy. The Marketing Manager of the Personal
Banking Division explained, to the regional meeting, that the student account campaign is based
on the concept of customer relationship marketing.
Ms A was shocked to find that she was the only manager in the region not to receive a
performance bonus. As a result, Ms A resigned from the Bank and has since joined a
competitor. A replacement manager for Branch 32 is now being sought, but no applications from
within AAA have been received. The deputy manager of Branch 32 has also been offered
promotion to manager but has declined. He has said that he would prefer to wait for another
branch management job.
The next senior management meeting of the Personal Banking Division
The Marketing Manager of the Personal Banking Division has approached you, as Management
Accountant of the Division, and asked you to attend the next senior management meeting of the
Personal Banking Division. He wishes you to help him to explain why the student account
campaign should be continued. He is keen to persuade his colleagues that, rather than abandon
the campaign, other policies and procedures should be changed to ensure its success.
The requirement for Question one is on page 5 which is detachable

for ease of reference
TURN OVER
P6 4 May 2009
[This page is blank]
May 2009 5 P6
Required:
Produce a report to the senior managers of the Personal Banking Division, covering the
following:
(a) Explain what is meant by the term customer relationship marketing, and how it
differs from transactions marketing.
(4 marks)
(b) Discuss the advantages and disadvantages, to AAA, of adopting a customer
relationship marketing approach to dealing with student account holders.
(12 marks)
(c) Briefly explain the concept of customer lifecycle value and how it might be used to
justify the student account campaign.
(4 marks)
(d) Calculate and analyse the customer lifecycle value of a student account, based on
the information provided, over the first ten years of the customer life. Assume that
all cashflows, with the exception of the recruitment cost, occur at the end of the
period to which they relate.
(14 marks)
Note: There are 10 marks available for calculations in this requirement.
(e) Discuss five changes that might be made to the branch managers bonus scheme,
if AAA chooses to continue with its customer relationship marketing approach to
student accounts.
(10 marks)
(f) Advise the senior managers of the Personal Banking Division whether to continue
with the student account campaign and, if so, which of the changes to the bonus
scheme (discussed in (e) above) should be adopted.
(4 marks)
Marks for use of an appropriate report format (2

marks)
(Total for Question One = 50 marks)
(Total for Section A = 50 marks)
End of Section A
Section B starts on page 8
TURN OVER
P6 6 May 2009
May 2009 7 P6
TURN OVER
P6 8 May 2009
SECTION B 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER TWO QUESTIONS FROM FOUR
Question Two
Genetically modified (GM) plants are produced by adding a gene from another species. This is
so that the plants are more resistant to weed killer or pests, and are able to grow with less water
or in other difficult conditions. GM crops are substantially more profitable for farmers than
normal crops because they produce far larger yields per acre. GM crops are seen by many as
the great hope for ending starvation around the world.
There are concerns, however, especially in Europe, about the possible long-term negative
impact of genetically modifying crops. There is further opposition based on fears that
conventional crops growing in fields some distance away from a GM crop can be damaged by
the GM crops DNA.
B is a privately owned biotechnology company based in Europe. B has developed a process
which makes seeds pest resistant without genetically modifying those seeds. Up to now, the
company has only operated at the laboratory scale and has no production facilities capable of
producing commercial quantities of the seeds.
Due to the nature of the biotechnology industry, B has been very secretive about the research
work it is conducting. However, the news of the recent invention has caused a lot of excitement
in the scientific community. Within this community this non-GM technology, developed by B, is
seen to have the potential to contribute significantly to both the economy and the well being of
populations in poorer countries.
Recently, however, B has faced increasing protests from environmental lobby groups and
elements of the local community near its laboratories. These groups want B to stop developing
and testing these non-GM seeds. These stakeholder groups claim, incorrectly, that the seeds
are genetically modified.
The government of the country in which B is based is currently conducting an enquiry into the
safety of GM crops. The enquiry is not likely to reach a conclusion for another 18 months. The
expected conclusion is a ban on the research and development of GM crops. Some other
countries have already banned research and development into GM crops, whilst other countries
have approved such research.
Although B does not genetically modify seeds, the Board believes that the company will suffer
from the adverse publicity that will result from a ban on research and development into GM
crops.
The Board of B is considering the following options:
1. The company could work to convince the stakeholders that it is not genetically modifying
seeds and that it is in the best interests of everyone that it is allowed to carry on with its
research.
2. The company could move to a country where there is a more tolerant attitude to research
and development in the area of biotechnology.
The requirement for Question Two is on the opposite page
May 2009 9 P6
Required:
(a) Discuss the corporate responsibility that B has towards the government, the
environmental lobby groups and the local community as stakeholders.
(8 marks)
(b) Recommend how B can improve relationships with the government, the lobby groups
and the local community.
(9 marks)
(c) Discuss the corporate social responsibility (CSR) issues relating to Bs option to
relocate, using the four dimensions of CSR; legal, ethical, economic and
philanthropic.
(8 marks)
(Total for Question Two = 25 marks)
Section B continues over the page
TURN OVER
P6 10 May 2009
Question Three
The telecommunications market in C, a developing country, has recently been deregulated and
opened to foreign competition. The national telecommunication company was split into four
separate companies, each of which has approximately 25% of the local market. The national
telecommunication company was using old equipment and was in need of considerable capital
investment. Each new company is individually quoted on the local stock market and the shares
are held by both institutional shareholders and members of the general public.
The government of C made the decision to open the telecommunications market up to private
investment to ensure that the country benefitted from the recent improvements in
communications technology. There was some strong resistance to the privatisation from other
stakeholders in C and the government is under political pressure to ensure that the country
benefits from any foreign involvement.
Y is a successful and well established international telecommunications company. It has grown
by acquiring companies in established markets. The company wishes to expand into C and is
considering how to achieve this. If successful, this will be the first time that Y has entered a
market at such an early stage of market deregulation.
The managing director of Y has stated that she would prefer to acquire one of the existing
companies in C because this is the approach Y has always used.
However, other members of the Board of Directors have suggested that the best way forward
may be to form a joint venture with one of the existing companies in the market. If Y were to
adopt this strategy, this would be the first strategic alliance into which the company had entered.
The managing director of Y is concerned about the risks involved in joint ventures and has said
that she is concerned about the reported lack of success of joint ventures.
Required:
(a) Explain the characteristics of a joint venture.
(5 marks)
(b) Discuss the benefits to country C of a joint venture between Y and one of the
telecommunication companies in C.
(10 marks)
(c) Evaluate the risks that Y should consider before entering into a joint venture with one
of the telecommunications companies in C
(10 marks)
(Total for Question Three = 25 marks)
Section B continues on the opposite page
May 2009 11 P6
Question Four
D is a printing company that was founded by three people 20 years ago. At that time, the
company used a new technology which had been developed by one of the founders. Another
founder member was a finance professional. The third person is Mr Z, who has a strong,
dynamic, personality. Mr Z has been the driving force behind the development and growth of the
business to its present size of 350 employees. With a charismatic leadership style, Mr Z was
very proud of the fact that he knew all employees by their first names and considered everyone
to be part of one big team. Everyone understood exactly what the company stood for and how
things should be done.
As the company has grown, Mr Z feels he is not in touch with newer members of staff and that
they do not understand his, and the companys, values.
In addition, the technology used by D is no longer considered innovative and there are a
number of other competitors operating in exactly the same way. D is still market leader within
the industry, but only by a few percentage points. Mr Z feels that the industry has reached the
maturity stage of its lifecycle.
An acquaintance of Mr Z, a management consultant, has suggested that the company should
have a published mission statement and a clear set of strategic objectives.
Required:
(a) Identify the characteristics of the maturity stage of the industry lifecycle.
(5 marks)
(b) Discuss the issues that the management of D would need to consider when creating
an appropriate mission statement.
(15 marks)
(c) Discuss the characteristics of strategic objectives that would be appropriate for D at
this stage of the industry lifecycle.
(5 marks)
(Total for Question Four = 25 marks)
Section B continues over the page
TURN OVER
P6 12 May 2009
Question Five
E is a global environmental charity. E is internationally recognised for its work in the area of
sustainable development and the protection of endangered species and habitats.
Some supporters of E have criticised the organisation for its lack of clear direction in an
increasingly competitive environment. Donations to charities have been declining, year on year,
for the past five years.
The structure of E is unusual in that there is an autonomous division in each country in which
the charity operates. There are 45 autonomous divisions, each headed by a CEO. It is the
responsibility of each divisional CEO to report to the Supervisory Board of 10 trustees, which is
based in a European country. Four times a year, the 45 CEOs meet for two days to discuss
performance and their plans for the future. The meetings usually finish with no clear decisions
about a unified direction for the charity to take. The divisions act independently for the next three
months. This has led to a number of crises, both financial and non-financial, in the past five
years.
As a result, the Supervisory Board has recognised that the charity cannot continue with the
existing lack of direction, control and accountability. The Supervisory Board has decided to
introduce a performance measurement and control system which will help it to implement a
clear strategic direction for the charity. The Supervisory Board recognises that this will be a
significant change for the CEOs and managers, and the Board expects considerable resistance.
A consultant has suggested E should introduce a balanced scorecard system of performance
measurement and control.
Required
(a) Discuss the advantages and disadvantages for E of introducing a balanced

scorecard system of performance measurement.
(12 marks)
(b) Discuss four reasons why the CEOs of E might resist the proposed changes.
(8 marks)
(c) Recommend the steps that could be taken to overcome the resistance to change.
(5 marks)
(Total for Question Five = 25 marks)
(Total for Section B = 50 marks)
End of Question Paper

Maths Tables and Formulae follow on pages 13 and 14 which are
detachable
May 2009 13 P6
MATHS TABLES AND FORMULAE
Present value table

Present value of $1, that is (1 + r)-n where r = interest rate; n = number of periods until payment
or receipt.
Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
P6 14 May 2009
Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years
1 (1+ r ) n
r

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
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
May 2009 15 P6
LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
1 KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
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 of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
3 APPLICATION
How you are expected to apply your knowledge. Apply To put to practical use
Calculate/compute To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 ANALYSIS
How you are 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 To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence
5 EVALUATION
How you are expected to use your learning to Advise To counsel, inform or notify
evaluate, make decisions or recommendations. Evaluate To appraise or assess the value of
Recommend To advise on a course of action
P6 16 May 2009
Business Management Pillar
Strategic Level Paper
P6 Management Accounting
Business Strategy
May 2009
Tuesday Morning Session
May 2009 17 P6
The Examiner for Management Accounting Business Strategy offers to
future candidates and to lecturers using this booklet for study purposes, the
following background and guidance on the questions included in this
examination paper
Section A compulsory
Question one requirement (a) tests learning outcome B(iv) discuss how suppliers and
customers influence the strategy process and recommend how to interact with them and the
syllabus content negotiating with customers and suppliers and managing these relationships.
Requirement (b) tests learning outcome A(iii) evaluate the nature of competitive
environments, distinguishing between simple and complicated competitive environments and
the syllabus content Porters Five Forces model and its use for assessing the external
environment and competitor analysis and competitive strategies. Requirement (c) tests
learning outcome C(vi) discuss and apply both qualitative and quantitative techniques in the
support of the strategic decision making function and the syllabus content assessing
strategic performance. Requirement (d) tests learning outcome and syllabus content as in
requirement (c). Requirement (e) tests learning outcome D(iii) identify problems in
performance measurement and recommend solutions and the syllabus content business unit
performance and appraisal, including transfer pricing, reward systems and incentives, and
agency theory. Requirement (f) tests learning outcome B(iv) and the syllabus content as in
requirement (a).
Section B two questions from four

Question two requirement (a) tests learning outcome B(ii) recommend pro-active and
reactive approaches to business/government relations and to relations with civil society and
the syllabus content approaches to business-government relations and with civil society.
Requirement (b) tests learning outcome B(ii) and syllabus content as in requirement (a).
Requirement (c) tests learning outcome B(ii) and the syllabus content as in requirements (a)
and (b) above.
Question three requirement (a) tests learning outcome C(i) evaluate strategic options and
the syllabus content acquisition and divestment strategies and their place in the strategic
plan. Requirements (b) and (c) test learning outcome and syllabus content as in (a) above.
Question four requirement (a) tests learning outcome A(iv) distinguish the difference
between static and dynamic competitive environments and syllabus content qualitative
approaches to competitive analysis. Requirement (b) tests learning outcome C(vii) discuss
the role and responsibilities of directors in the strategy development process and syllabus
content mission statements and their use in orientating the organisations strategy.
Requirement (c) tests learning outcome D(i) evaluate and recommend appropriate control
measures and syllabus content assessing strategic performance (i.e. the use and
development of appropriate measures that are sensitive to industry characteristics and
environmental factors).
Question five requirement (a) tests learning outcome D(ii) prepare and evaluate
multidimensional models of performance measurement and syllabus content
multidimensional measures of performance (e.g. the balanced scorecard, the results and
determinants framework, the performance pyramid). Requirement (b) tests learning outcome
D(vi) discuss the role of change management in a strategic context and syllabus content
change management in a strategic context. Requirement (c) tests learning outcome D(vi)
and syllabus content as in requirement (b) above.
P6 Brief Guide 18 May 2009

The Examiners Answers for P6 - Management
Accounting Business Strategy
SECTION A
Answer to Question One
THE USE OF CUSTOMER RELATIONSHIP MARKETING

IN AAA
To: Senior Managers of the Personal Banking Division

From: Management Accountant
Date: Today
Terms of reference
This report examines various aspects relating to the adoption of customer relationship marketing
and, in particular, the implications of this technique for the student account campaign and the
branch management bonus scheme.
(a)
Customer Relationship Marketing
Customer relationship marketing is the devotion of marketing resource to maintaining and
exploiting the organisations existing customer base, rather than using resources solely to attract
new customers. It differs from conventional, or transactions, marketing in that it focuses on
developing a long term relationship with a customer, and securing their loyalty. A criticism of
transactions marketing is that it encourages a series of one-off sales, each of which is relatively
expensive to secure. It is widely felt that it is far cheaper to retain an existing customer than to
secure a new one.
(b)
The student account campaign
The implications of using a customer relationship marketing approach in the current student
account campaign are as follows:
Advantages to AAA
Attracting new customers, and keeping them for at least three years (while they have
free banking) should lead to better customer loyalty and a reduced risk of defection
both during and after the three-year free period. Bank customers have very high
bargaining power, as they are able to switch at little or no cost.
May 2009 19 Examiner's Answers P6
Differentiating the service offering, by giving one of the best new student deals in the
industry and providing excellent service levels, should allow AAA to gain a competitive
advantage over rivals. Currently, the deal offered by AAA is on a par with the best
available from the major banks. While a smaller bank offers a better deal, it is unlikely to
be able to compete in terms of branch coverage.
A loyal ex-student account pays back (on an undiscounted basis) within two years of
losing the entitlement to free banking. (2x 140 contribution, less 50 recruitment cost
and 3x 60 operating cost). Thereafter, each loyal ex-student account contributes 140
annually.
Loyal student customers should turn into loyal personal and business customers, thus
generating significant additional profit for little or no marketing outlay. Such customers
may also buy additional products from the bank, such as credit cards, insurance and
loans. These should also generate profit, again at little or no marketing cost.
Disadvantages to AAA
Offering any free or cheap service for an initial period means that the bank is taking a
risk that a student may defect during or after the free banking period. This could result in
the bank losing money on student accounts, while failing to recoup those losses from
the loyalty of ex-students.
There will be a short-term adverse impact on the profitability of the bank, as all new
student accounts run at a loss. However, the campaign has been running for three
years now, and the bank should be able to tell what proportion of its students remain
loyal after free banking has been withdrawn.
AAA might find that the overall performance of the bank deteriorates, as a result of the
worsened motivation level of branch managers (see below). There is also likely to be an
adverse impact on staff turnover, as has already been the case with Branch 32. Staff
obviously have fairly high bargaining power, as they are able to find employment with
rival banks. It may prove impossible for the bank to recruit or transfer managers to
branches with a large number of student accounts.
(c)
Customer lifecycle value
The essence of customer lifecycle value is to estimate the present value of the net cashflows
likely to arise during the life-time of a customer. This is done by estimating:
The cost of acquiring a customer
The revenues generated by a customer
The cost of providing products or services to the customer
The probability of the customer leaving or failing to return
The probability of the customer purchasing additional products or services
The value of any further customers recruited by the customer as a result of referrals
The concept of customer lifecycle value can be applied to student account customers, to
determine whether each such customer is likely to generate a profit over a lifetime.
Examiner's Answers P6 20 May 2009

(d)
Customer lifecycle value of a student

Time Event Amount Probability Expected Discount Present
still loyal value factor value
0 Recruitment cost -50 1.00 -50.0 1.000 -50
1 Cost -60 0.80 -48.0 0.909 -43
2 Cost -60 0.64 -38.4 0.826 -32
3 Cost -60 0.51 -30.6 0.751 -23
4 Charges less cost 140 0.41 57.4 0.683 39
Lifetime value -19
Note: It would be equally valid to put the administration cost of 20 at time T1

This calculation excludes any effects from the purchase of additional banking products, such as
loans, insurances and credit cards. The cash inflows from such products are likely to be
significant.
The calculation also ignores any possible referrals, where the account holder introduces friends
or family as customers. These accounts should also generate positive cashflows.
It is clear, from the calculation, that while a student account shows a negative npv over the ten
years, such accounts are profitable in each year after the first three. AAA should re-visit the
assumptions used, to check that they are reasonable.
(e)
Possible changes to the branch managers bonus scheme
Note: Any five of the following, or any other reasonable suggestions, each discussed in the
context of the scenario, would be sufficient to earn good marks. This answer has been written to
illustrate the range of possible suggestions.
At present, the bonus scheme for branch managers is based on the profitability of their branch.
One effect of this is to penalise branches with a high number of new student accounts. If the
bank wishes to reduce or remove this penalty, the bonus scheme might be changed in the
following ways:
1) The Personal Banking Division could stop apportioning marketing costs relating to new
student accounts. While this represents only 30 per account, it is still a significant
proportion of the loss in the first year.
2) The Personal Banking Division could agree to absorb the loss on the first three years of
activity for student accounts as a central cost. This is estimated above at 148 (being the
cumulative present value at time T3). This would have a significant impact on the
profitability of each branch, and would effectively remove the penalty from those branches
with high numbers of student accounts.
3) The bonus scheme could be based on an average of the preceding three to five years
profits. This would smooth the impact of new student accounts, and recognise the
concept of lifecycle value. It might, however, prove unpopular with new managers who
work hard to turn around the performance of their branches.

4) The scheme could be changed to exclude from branch profits the impact of all free
student accounts. This would remove the penalty, but would be complex to calculate.
5) The scheme could be changed so the branch managers bonus is calculated on the basis
of regional or bank profitability, rather than on that of the individual branch. This will
remove the discrepancy in bonus levels between branches, and solve the problems of
demotivation and staff turnover discussed earlier. It might, however, be unattractive to
managers who currently earn high bonus levels. It would, however, be fairer and would
involve little administration cost.
6) The Personal Banking Division could change the bonus scheme so that it is based on the
lifecycle value of customer accounts, not on branch profits. While this would give the most
realistic view of branch performance, it would be very complex to set up and administer.
(f)
Conclusion and recommendation
As can be seen from the above arguments, the adoption of a customer relationship marketing
approach in the student accounts campaign has both advantages and disadvantages. Looking
at the customer lifecycle value of a student account, it is clear that the account is loss-making
when taking into account the free banking period and assumed high defection rate. The only
other disadvantage of the campaign seems to be its impact on the branch managers bonus
scheme.
It is recommended that the Personal Banking Division continue to offer the current three years of
free banking to new students. The bank must examine the real defection rate, now it has three
years of experience with the campaign, and look at ways to reduce the defection rate by
improving the level of service offered. The bank should also look at the value of other services
and accounts sold to students and ex-students, and incorporate these into the calculation of
lifecycle value. It will, however, be necessary to change the branch managers bonus scheme.
Of the suggestions made in section (e) of this report, option 2 is preferred payment of a 148
subsidy to branches for each new student account from the divisional marketing budget.
.

SECTION B
Answer to Question Two

Requirement (a)
The corporate responsibility that an organisation has towards the named stakeholder groups
can be described as follows:
The Government
B has a responsibility to continue to act in a legal manner and not disregard any
government legislation and similarly to act, and make sure that it is seen to act, in an
ethical manner. In this respect, the responsibilities to the government can generally be
seen to be discharged by compliance with the law and operating in an open and
transparent manner.
B has a duty to conduct its business in a legal way complying with the relevant laws at
both national and local level. This will mean that the company will need to respect
legislation covering employment, health and safety, commercial aspects of business
and other relevant acts of parliament. Locally, there will be a need to comply with
planning legislation and various environmental controls.
B has a duty to keep the government informed of the work it does and the developments
that have been made. The development of a new technology, once patented, will benefit
the country as a whole. Nationally, the reputation of the government and the country will
be enhanced by the leading edge research being done by the company. It could be
argued that, by developing seeds that will make it easier for disadvantaged farmers to
grow crops, it will be acting in this way.
Additionally, B should be acting as a good employer, developing the staff that work for
the company so that they are better citizens and are a greater resource to the
government and the country.
B has a responsibility to generate revenue and to pay taxes on its activities.
The environmental lobby groups
B has a responsibility to be as open and honest with the environmental groups as
commercial confidentiality permits. B has a duty to explain to the scientists that are
employed by the lobby groups and be open about the science the company is
employing and explain that it is not modifying seeds genetically in the conventional
sense.
B has a duty to explain the safety of the process and the potential long term benefits to
the wider community that the technique offers.
The local community
B has a responsibility to act in both an ethical and moral fashion as it conducts its
research.
B has a responsibility to be open and honest in its communications with the local
community so that they are as well informed as commercial confidentiality allows.
B has a responsibility to the local community to go further than mere compliance with
local legislation. The company should also be a good corporate citizen and play an
active part in the welfare of the local community. As such, B should support local
initiatives and infrastructure building, particularly in the areas of education.
Requirement (b)
If the directors of B decide to stay in the country and convince the various stakeholders that its
process is safe, there will need to be a more transparent approach to openness, communication,
education and consultation. The company is in the present situation because two relatively
powerful stakeholder groups do not understand the nature of the business that B is conducting.
The government
The government should also be considered a powerful group, since it is soon to make a
judgement about a large sector of the biotechnology industry. The government, whilst
conducting its enquiry, is certain to gather information from the lobby groups, and quite possibly
from the local community, before reaching a decision about the future of the research.
B should make the government aware of the advantages that the research will bring to
the country. This should be done at the highest possible level. The fact that it has
developed a process which does not involve genetic modification should be stressed
particularly as the government is likely to be antiGM crops. Additionally, the point
should be made that the development has the prospect of enhancing the international
reputation of the country as the product is likely to have far reaching impacts. The
prospect of significant export earnings should also be made.
The government will employ scientists of its own and it is not unreasonable to expect B
to be able to convince those scientists that the companys new technology is both safe
and beneficial. B should make every effort to build relationships with those scientists
and keep them informed of the development process.
In its dealings with the government, B should build closer relationships with the civil
servants in the sections of government associated with trade, overseas aid, and
scientific matters. It might also build closer relationships with universities which are run
by the government. This relationship building will help, and may even lead to employees
of B being consulted by the government about future developments within the industry.
B should be, publicly, seen by all concerned to be cooperating with the government in
the current enquiry and ensuring that it convinces it hat the process it uses does not
involve genetic modification. There should be regular press briefings and articles within
the popular scientific and agricultural press describing the nature, safety, and benefits of
the new process.
Naturally, this will always present difficulties for any research-based organisation since
much of its work is, by definition, confidential.
The environmental lobby groups
Both the lobby groups and the local community believe, incorrectly, that B is experimenting with
genetically modified crops. Since it is not, and since the product it has developed should be
beneficial to disadvantaged groups of farmers, it should be possible to convince them to be
supportive of B rather than against the companys operations. The problem with the lobby
groups has arisen because of poor communication and misunderstanding.
B must explain to, and convince, the lobbyists that B is acting both ethically and as a
good corporate citizen. It is important that the lobby groups are convinced that Bs
process does not involve genetic modification. Again, it is safe to assume that the lobby
groups will either employ scientists on their staff or will have scientific experts to whom
they regularly refer. B must explain to those scientists enough of the new technology for
them to accept that this process is beneficial.
B should stress that, if the improved seeds lead to better crops for farmers, then they
will have a better standard of living and, possibly, become more ecologically aware
themselves.
B should offer to conduct a joint education programme with the lobby groups for farmers
who are using the new seeds. This would help to build bridges between the
organisations and, to some extent, would give a seal of approval as the commercial
organisation is seen to be working with the campaigning organisation for the betterment
of disadvantaged groups. B could fund this education programme and use its own
scientists, together with those from the lobby groups, to visit foreign agriculture
ministries and explain the value of the process.
The local community
Although this is most probably the least powerful of the groups that are presenting B with
problems, it is still important, since it can influence government in its decisions. Whilst this is
only possible at national government level, it is certain at local government level where these
people are voters and can bring pressure to bear on local politicians to stop B conducting its
business.
B should determine the scientific qualifications of any spokespersons for the local
community to see if there are any who would understand the current process. If there
are any suitable qualified people, B should concentrate on them to act as messengers
to all concerned parties, such as local farmers and associations.

B should also recognise that the local community will, to a large extent, be dependent
upon the media (both local and national) for information. Regular press releases and
communication with the local press should be undertaken.
B should also recognise that the community will look to the local government to protect
it. B will need to communicate as openly as possible with the local government to
ensure that it accepts that the process is safe and does not involve genetic modification.
B should concentrate on building closer relationships with local people and on
convincing the lobby groups. Closer relationships with the local community can be built
in a number of ways. Some of the research scientists, employed by B, could give talks
at the local schools, both to the children during school time and to interested groups of
adults in the evenings. Sponsorship of local events and playing an active part in the life
of the community would also help.
Requirement (c)
Considering the four elements of corporate social responsibility, legal, ethical, economic and
philanthropic, the following points should be considered:
Legal
There is nothing illegal in what B is proposing to do. B is just exchanging one legal environment
for another, which it believes to be less onerous. As long as the legal system in the country to
which it chooses to relocate is a just, fair and transparent one, then there should be no
argument against relocation. However, B will need to be aware of the body of international law
that is developing in the area of genetic engineering, and to ensure that it complies with that
(and with best practice) in terms of its research & development and production operations.
Similarly, should B choose to develop the business with a joint venture partner, B must ensure
that its chosen partner conducts its business to the same legal standards.
Ethical
The issue of the ethical considerations of Bs action is more complex. Decisions about whether
something is ethical or not are more dependent upon peoples perceptions and, certainly in this
situation, the environmental lobby groups are convinced that genetic engineering and
manipulation are wrong. This will be the case regardless of where B intends to conduct its
business. Quite possibly the local community, which has protested against Bs business, will be
happy to see B leave and will be satisfied that the business is not in my back yard. The
directors and employees of B are already happy that their work is ethically sound, so it is only
external stakeholders that might present a problem. Whether there will be stakeholders in the
chosen country, or internationally, that will consider Bs business to be unethical is an issue
which B must address. It may well be that the government and population of the chosen country
will feel that the ability to produce seeds which are better able to feed people outweighs any
concerns about genetic modification.
Economic
There is no doubt that the market for genetically modified food is growing rapidly and in
economic terms this is a good business to be in, both for B and the country in which B is based.
For B, the fact that it can continue in business will be good for its shareholders and, with a
suitable market, presents the opportunity for growth. For the country to which it relocates, there
is the prospect of tax revenue from Bs business and from the costs that B will incur in the
country when it makes use of local goods and services. If B is successful in the country, there is
also the prospect that other, similar companies, will choose to relocate there and a cluster
effect may develop. It will be in Bs interests to, wherever practicable, arrange for technology to
be transferred to the host country via cooperative arrangements with the local universities and
public research facilities as long as it is sure that the companys intellectual property rights are
protected. Joining in cooperative research projects with local industrial and/or industrial
associations would also be a good idea.
Philanthropic
In addition to its commitment to the business and economy of the chosen country, B needs to
consider the softer side of its involvement. B should aim to improve the quality of life of the
workforce, their families, and the community at large. There should be an objective of building
sustainable livelihoods and being seen as a good corporate citizen. CSR is sometimes defined
as business giving back to society. For B this could include scholarships for locals to attend
university, education programmes for farmers, and partnership in education and social projects.
The staff who re-locate with B will have both scientific skills and, quite possibly, a broader
knowledge base which they can pass on to the local community via a programme of
volunteering. Similarly, where their families have relocated with them, those family members can
work with, teach and learn from the local community.
If B handles the relocation sensibly, there are no CSR implications for the company that cannot
be effectively dealt with.
Note: For the purpose of teaching, these answers are more detailed than necessary.

Answer to Question Three
Requirement (a)
The term joint venture refers to a cooperative venture between two or more companies that
agree to work together to exploit an opportunity that would be difficult for one of those
companies alone to deal with. Y and the local partner would together exploit the opportunities
presented by the privatisation of the telecommunications market of C.
It is usual to form a separate company in which each partner holds an equity stake. Y and the
local partner would each put a combination of capital and expertise into the joint company.
There would need to be an agreement on the final split of ownership of the joint venture.
The partners involved will share the risks and the rewards of the business which they conduct.
Each partner may contribute different skills and competencies to the alliance or it may be that all
are equally capable of the tasks but intend to benefit from scale economies. In the most extreme
cases, one partner will bring all of the necessary expertise and the other partners will only
contribute capital. Those partners are sometimes known as sleeping partners. It is unlikely that
either Y or the local partner will only contribute capital to the joint venture. It is more likely that Y
will contribute technical expertise and the local partner will contribute market, and quite possibly
political, knowledge. It is also possible that Y may be in a better position to contribute capital to
the joint venture and may earn a majority share of joint venture.
Joint ventures are often used to enter political markets where foreign companies are not
necessarily particularly welcome. In some cases, it is a condition of entry to a market that the
entrant forms a company with a local partner before it is allowed to conduct business within the
country. In this case, this may be particularly important since, although there is no specific
legislation in place, the government of C is concerned about the benefits to the country of any
foreign involvement.
Requirement (b)
Since the decision to privatise the telecommunications industry was not welcomed by all of the
stakeholders within C, the government is under pressure to demonstrate that the country
benefits from any involvement by foreign firms.
If the government allows Y to acquire one of the existing companies in the market, it will have no
guarantee that the potential benefits will accrue to C.
By permitting a strategic alliance, the government is more likely to see the following benefits for
the country:
There should be a transfer of technology to the resident company from the foreign
partner which can be implemented in other parts of the local companys business.
The staff of the target company can learn from their involvement with the staff of Y. Y is
more experienced at the commercial management of a telecommunications company.
Additionally, as there is likely to be a large programme of capital investment, there will
be a transfer of project management skills from Y.
If the telecommunications industry within C is to be updated with a large amount of
capital investment, this cost will be shared by Y. It is more likely that Y can be
encouraged to make more investment in a joint venture than if it had total control of the
company within C.
The government of C is likely to receive more tax revenue from a joint venture than it
would from a wholly owned subsidiary of Y. There are also likely to be fewer arguments
between the government of C and the management of Y regarding what constitutes a
fair reward for the business conducted within C.
With the lessons learned from the joint venture, it is possible that, in the future, there
may be overseas development opportunities for the telecommunications industry of C.
With the formation of a joint venture, it may be easier to encourage local sourcing of
components and other supplies than would be possible with a wholly owned subsidiary
of Y.

Requirement (c)
Before entering a joint venture, Y will need to consider, and deal with, the following risks:
Characteristics of the potential partner
1. Due diligence
Y must assure itself that the company with which it is going to partner has, and will, conduct
itself in a legal and ethical manner. The financial probity and security of the potential partner
must be proven without a shadow of doubt. Once Y has entered the partnership, its reputation
will be damaged should any bad practices of its partner be discovered.
2. Skills audit of potential partner
Y must also assure itself that the potential partner has the requisite skills to complement those
of Y in the joint venture. Whilst Y has the technical knowledge, the potential partner will need to
have both a good reputation in the market and excellent market knowledge. Hopefully, the
partner will also have a good sales team in place to capitalise on its market knowledge and the
technical expertise of Y. If these skills are not present, then Y runs the risk of a slow start and
having to do more than its fair share of the work to make the joint venture successful. This will
increase the costs of the operation to Y and reduce any profit potential.
3. Objectives of joint venture partner
Y needs to be clear about the intentions of its future partner. The partner may have different
views on the level of market growth, or the final outcome of the joint venture. Similarly, the
partner may have different views to Y on the distribution of profits. Whilst Y may wish to invest
heavily in the growth of the joint venture and the market, the partner may wish to see a large
distribution of profits. If these differences exist in the objectives of the two partners, this will lead
to conflict and to sub-optimal performance. Both of these will add extra cost and, in the event of
litigation, damage to the reputation of Y as well.
Characteristics of Y
1. Clear aims and objectives
Y should be clear, at the outset, of what it wishes to achieve from the joint venture. The
possibilities are that Y may wish to carry on with the joint venture indefinitely with, or without,
significant growth of market share; to leave the country after a finite period of time; or to
eventually take over its joint venture partner should further deregulation permit this. If Y does not
have a clear idea before the joint venture starts, there is an increased possibility of disputes with
the partner with the additional costs that have been described under 3 above.
2. Requisite skills
Y has never been involved in a joint venture before and has always entered new markets via
acquisition. The pattern of working and the managerial skills required for joint ventures are
different to those of ownership. Similarly, all staff who are to be involved in the joint venture
must be made aware of the differences in required practices. There may well also be a need for
cultural sensitivity for those members of staff and management who are to work with the
inhabitants of C. In the event that Y does not have these skills and competencies, there is a risk
of misunderstanding, sub-optimal performance and, most probably, conflict with the partner.
3. Clear procedures and systems
Y will need to ensure that the processes and procedures are in place for the joint venture and
that they are kept completely separate from those for the rest of the company. In accounting and
procedural terms, the joint venture is a separate entity, and must be managed as such. The
Heads of Agreement governing policies and procedures needs to be written carefully to ensure
that both parties understand both their rights and responsibilities. In the event that this is not
done, it will lead to confusion and conflict. Part of the Heads of Agreement will need to specify
what happens in the event of disagreement to avoid expensive and time consuming legal
battles.
4. Protection of intellectual property
One of the reasons that the government of C will prefer joint ventures is the hope that
technology will be transferred to the local partner and subsequently to other local firms. Y will
need to clearly establish what level of technology transfer that it is prepared to accept. In the

event that this is not decided, and procedures are not in place to protect that which it wishes to
withhold, Y faces the risk of the local companies becoming as adept technologically as itself. In
the event that there is a change of government to one that is less business friendly, the
legislation permitting joint ventures could be scrapped, the assets seized, and Y thrown out of
the country without compensation.
5. Ys learning objectives
Y also needs to decide beforehand how it will manage its own learning from the joint venture.
Invariably, joint ventures are a good means of learning about local markets and Y must have a
clear idea of how this will be managed and where the responsibility for gathering, and
consolidating, knowledge will lie within its own company. In the event that this is not organised
beforehand, Y will always be a weaker partner and will not capitalise upon the opportunity that
the joint venture presents.
Note: For the purposes of teaching, this answer is more detailed than necessary.

Answer to Question Four
Requirement (a)
The industry lifecycle can be considered to have four stages. These are introduction, growth,
maturity and decline.
The third stage, maturity, is characterised by:
Superior quality products with an increased degree of standardisation amongst product
offerings from different competitors. In the case of D, the technology which was
developed 20 years ago, is now in common usage.
Buyers are quite widespread and, as the product offering has become more
commonplace, many more buyers are using the product. D, and its competitors, will
have a wide range of customers and, since the product has become standardised, there
will be relatively low switching costs for those buyers.
The nature of the competition will have intensified and there will start to be those
competitors who leave the industry as the competition becomes fiercer. From its
position of market leadership, D may decide that this is a time of opportunity and seek to
acquire some of the companies that struggle, or at least gain the market share of those
that leave the industry.
Margins will fall as buyers demand lower prices in exchange for their loyalty and as they
come to understand the product better. Margins will also be impacted by increased
advertising and marketing costs. For D, the challenge will be to maintain its market
share and find some way, other than the technology, to demonstrate a sustainable
competitive advantage.
Note: Although the question uses the verb identify, for the purposes of learning, the answer has
been considered using the verb explain.
Requirement (b)
In the case of D, one of the primary reasons for producing a mission statement will be to make
sure that new, and existing, employees are aware of the culture of the organisation. The mission
statement needs to indicate the basic values and beliefs of the organisation. In the case of D,
these values and beliefs are, to a large extent, the values and beliefs of one of its founders, Mr
Z. Therefore, the culture has been heavily dependent upon the behaviour of Mr Z. The fact that
Mr Z was proud of the fact that he knew all employees by first name implies that there is an
open culture and, if this is to continue, it would need to be emphasised in the mission statement.
However, D also needs to consider whether those values and beliefs are appropriate in the
changing climate of the industry. Almost certainly there will be those who consider that it is
appropriate that the company continues to operate with everyone on first name terms and such
a friendly atmosphere. However, this may be harder to achieve as the competition intensifies
and this underlines the need for a clear and engaging mission statement for D. There should be
a clear and specific statement to define the acceptable behaviour patterns of those who work for
the company. This may involve an emphasis on maintaining the open working environment that
seems to have been present under the direct management of Mr Z.
There is also a need for the statement to be realistic and attainable. However, the statement
also needs to stretch those involved. In addition to the behavioural aspects of what the company
wants to achieve within, D may also want to encourage a particular pattern of behaviour towards
customers. As the industry lifecycle is reaching the mature stage, customer loyalty will be
increasingly important as all of the companies within the industry compete harder for a shrinking
market. Ideally, the mission statement should be made public and designed to inform customers
how they can expect to be treated by employees of D.
The mission statement should reflect the distinctive advantages that the company has and be
based on an objective analysis of its capabilities. The fact that D has got to its present position
by exploiting a technology which it invented should be brought out in the statement. In the case
of D, the current technology is no longer distinctive, and the market is reaching maturity.
Therefore, it needs to be recognised that this technology is no longer unique and more
innovation may be needed. If the company is to continue to prosper, then there will be a need to
identify and exploit new revenue streams. There will, therefore, need to be an emphasis in the

mission statement on innovation and exploration. The mission statement should be flexible
enough to be robust when there are shifts in the environment.
D needs to carefully consider the nature of the business in which it operates. As the industry is
maturing, this may be changing and it may be more important to it to decide what business it is
in. At the moment, D could be described as a company that supplies distinctive printing
solutions. However, as the industry reaches the mature stage, there may be a need to
emphasise the cost effectiveness of its solutions. This change of emphasis from product
innovation to process innovation may need to be brought out in the mission statement.
D should also use the mission statement to make a statement of sustainable competitive
advantage. D is currently market leader and it may wish to state publicly that it is its intention to
maintain that position. If that is not the case, then there should still be a clear indication, for all
stakeholders, of where the company wants to be within the industry for the foreseeable future.
The mission statement should be relatively brief and memorable and should reflect the style of
management that the employees have experienced from Mr Z. It should not be a long document
that people cannot memorise easily. Since it should be written in such a way that it means
something to everyone in the company, it should be impactful as well. Ideally, D should be
aiming to produce a mission statement that consists of a few sentences which cover what the
company does, how the employees treat each other, how the employees treat external
stakeholders, how the company treats the environment and what the company aspires to.
Requirement (c)
As the nature of the industry is changing, any objective that D sets for itself will need to
recognise those changes.
There are five characteristics of objectives usually described by the acronym SMART:
a. Objectives should be specific and unambiguous in terms of what should be achieved.
In the case of D, with an industry that is becoming more competitive with declining
margins, a clear statement about profitability or market share would be appropriate.
b. Objectives should be measureable, with a specified quantity. For D, this would mean
that, like many other companies, it gives a numerical value to the ROCE it intends to
achieve or the percentage market share it wishes to grow to.
c. Objectives should be attainable and within reach. It might be unrealistic at this stage of
the industry lifecycle to say that it intended to increase ROCE, or market share, by a
factor of 20% in the space of a year.
d. Objectives should be relevant and appropriate to the mission of the firm. This would
depend upon the nature of the mission statement that D had written, but had it said in its
mission statement that it wished to continue with the open, team base, style of
management financial objectives that related to cutting employee costs would not be
appropriate.
e. Objectives should be time-bound, and have clear completion dates for attaining the
measures specified.

Answer to Question Five
Requirement (a)
The balanced scorecard system of performance measurement comprises four perspectives;
financial, customer, internal business perspective, learning and development. The purpose of
the balanced scorecard is to translate mission and strategy into objectives, and provide a
framework and a language to communicate the strategy to the whole organisation.
There are a number of advantages to be gained by E:
The introduction of the balanced scorecard can make sure that the corporate strategy of
E is known by all of the divisional CEOs and all of the functional managers operating in
those divisions.
The CEOs and managers will be forced to develop success measures for their particular
areas which support the corporate goals of the whole organisation.
The balanced scorecard will provide them with control information to encourage them to
modify their behaviour to fit in with the overall goals of the organisation.
The balanced scorecard covers a number of different perspectives and that diversity of
measures may be better suited to an organisation, such as E, which has pluralistic
objectives and is not simply driven by shareholder value.
The introduction of a balanced scorecard should act against the short term approach
that exists in the organisation at the moment. With a clear set of objectives and targets,
it will be harder for managers to come to the quarterly meetings and then go away and
ignore what is their required performance.
It is important to E that it is seen to be decisive and effective in its fund raising efforts
and that the money is seen to be used efficiently and effectively in dealing with the
causes which it supports. If E uses a balanced scorecard for performance
measurement, it can use the results to demonstrate to its donors and other
stakeholders, that the money raised is being put to good use.
However, there are a number of potential problems for E with the concept of a balanced
scorecard:
The measurement system will not lead to a single summary control. Whilst this is a
bigger problem for commercial organisations, it is still an issue for E since CEOs and
managers may find it difficult in the first instance to understand, and accept, the
measures that are created and used. For instance, there will be a debate within the
charity about what constitutes a customer in the traditional form of the balanced
scorecard. However, the system is meant to be flexibly applied and the definition of
customer could easily be translated into beneficiary or even donor. Additionally, E will
have many more stakeholders than a commercial organisation of similar size and a
performance measurement system using a diversity of measures is better suited to the
organisation.
The variety of measures used may give conflicting signals to CEOs and managers who,
initially, will need guidance in the interpretation of the results.
The largest and most daunting problem for E will be the culture change required of the
managers in the implementation and use of the balanced scorecard. The CEOs have
enjoyed a great deal of autonomy and have, to a large extent, ignored the corporate
direction suggested by the Supervisory Board. There will be a need for a significant
change in the corporate culture at E but, to a large extent, this is necessary anyway,
since the Supervisory Board has agreed that things cannot continue as they are.
The culture will need to change to recognise that E has a set of processes which have
to be managed and which need to work together.
There will need to be recognition that there are value adding as well as cost adding
activities and that, in future, the organisation will have to have in place a system of
selecting those projects which add the most value in the perspective of a number of
different stakeholders.
There needs to be recognition that the control system is one of information provision
and responsibility rather than one of command and control. Since there was limited
compliance with any system that might have been in place, this change might not
present such a large issue. However, the Supervisory Board will need to recognise this
change as well. The introduction of the balanced scorecard is, to some extent, a
consultative exercise rather than a situation where senior management dictate what will
happen. There will still be a need for transparent and open management and leadership
from them.
Requirement (b)
The CEOs could decide to resist the proposed changes for the following reasons:
They may simply not understand what changes are to be made and why they are
necessary. There may not be a clear understanding of what a balanced scorecard is
and what its purpose is.
Similarly, there may be a lack of understanding of the process of change that will occur
whilst the balanced scorecard is being implemented. The CEOs may not understand
that they should be involved in the process of developing the scorecard and that they
should have significant input into the design of the measures that will be used in the
perspectives for which they have responsibility.
The CEOs may not trust the motives and skills of the members of the Supervisory Board
which has made the decision that this is the best way forward for E. Similarly, it may not
trust the people who have the task of facilitating the introduction of the balanced
scorecard. Again, this lack of trust could be based on the motives or the competencies
of those concerned.
The CEOs may feel that their self interest is threatened by the proposals. They may be
concerned that there will be a loss of personal power or status if a more rigorous control
system is introduced; this may be particularly true if the system is transparent. They
may fear comparison of their performance with that of their colleagues and believe that
they may not be able to perform as well as them.
They may be concerned that the nature of the quarterly meetings will change and that
friendships and social gatherings may be lost as E becomes more business like.
It may also be the case that some of the CEOs simply disagree with what is being
proposed. They may not see the need for more formalised performance measurement
and control, feeling that the organisation is doing well enough as it is in the way that it is
managed at the moment.
There is also the possibility that some of the CEOs will feel personally upset because
they were not involved, or consulted, in the decision to introduce a performance
measurement system and even about the suitability of the balanced scorecard for this
purpose.
Requirement (c)
In all cases, the resistance of the CEOs may be overcome by a clear communications process,
and a clear plan of action regarding the steps that should be taken.
The stages in that plan could be described as follows:
a. Communication at the earliest opportunity the CEOs should be informed of the need
for change and the proposal for how that change will be brought about.
b. Education that communication process should involve a clear education programme
about the balanced scorecard system in terms of what it is intended to do and how the
implementation should be carried out.
c. Consultation there will be a need to consult widely amongst the CEOs. Those who
are likely to be more cooperative should be co-opted to convince others and to act as
a focus for positive opinion about the changes intended.
d. Negotiation recognising that some CEOs will feel some element of loss, either of
status or power, there will need to be a process of negotiation and some concessions
made to those CEOs to encourage them to accept the changes made. Quite possibly,
giving them specific responsibilities within the change programme may help in this
direction.
e. Manipulation it may be necessary to manipulate some of the CEOs by appealing to
their better nature and the fact that what is being proposed is for the good of the
organisation as a whole expecting them to make a sacrifice for the greater good
might be necessary.

f. Coercion as a last resort it may be necessary to use force to convince the more
unwilling CEOs to comply with the proposed changes. This could be in the form of
suggested disciplinary action, or even the threat of redundancy by redesigning jobs
and job descriptions.
Note: It would be equally valid to structure your answer using an alternative recognised model
of the change process, for example Lewins model.

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May 2009 Examinations

Paper P6 Management Accounting Business Strategy

Examiners Brief Guide to the Paper 18

Published separately on the CIMA website (www.cimaglobal.com/students) from mid-September

Business Management Pillar

Strategic Level Paper

You are allowed three hours to answer this question paper.

Answer the ONE compulsory question in Section A on pages 2, 3 and 5. The

Answer TWO of the four questions in Section B on pages 8 to 12.

The requirement for Question one is on page 5 which is detachable

Marks for use of an appropriate report format (2

(Total for Question One = 50 marks)

(Total for Section A = 50 marks)

The requirement for Question Two is on the opposite page

(Total for Question Two = 25 marks)

Section B continues over the page

Section B continues on the opposite page

Section B continues over the page

(a) Discuss the advantages and disadvantages for E of introducing a balanced

(Total for Section B = 50 marks)

End of Question Paper

Present value table

Periods Interest rates (r)

Periods Interest rates (r)

Periods Interest rates (r)

Periods Interest rates (r)

Strategic Level Paper

Tuesday Morning Session

Section B two questions from four

P6 Brief Guide 18 May 2009

Answer to Question One

THE USE OF CUSTOMER RELATIONSHIP MARKETING

To: Senior Managers of the Personal Banking Division

Examiner's Answers P6 20 May 2009

Note: It would be equally valid to put the administration cost of 20 at time T1

May 2009 21 Examiner's Answers P6

Examiner's Answers P6 22 May 2009

Answer to Question Two

Examiner's Answers P6 24 May 2009

Examiner's Answers P6 26 May 2009

May 2009 27 Examiner's Answers P6

Examiner's Answers P6 28 May 2009

May 2009 29 Examiner's Answers P6

Examiner's Answers P6 30 May 2009

May 2009 31 Examiner's Answers P6

May 2009 33 Examiner's Answers P6

Examiner's Answers P6 34 May 2009

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