PROFESSIONAL STAGE APPLICATION EXAMINATION

MONDAY 19 MARCH 2012

(2½ hours)

BUSINESS STRATEGY
This paper is made up of THREE written test questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ball point pen only.

3. Answers to written test questions must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

The questions in this paper have been prepared on the assumption that candidates do
not have a detailed knowledge of the types of organisation included in the paper. No
additional credit will be given to candidates displaying such knowledge.

IMPORTANT

Question papers contain confidential Place your label here. If you do not have a label
information and must NOT be removed you MUST enter your candidate number in this
from the examination hall. box.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright © ICAEW 2012. All rights reserved. Page 1 of 8

1. Debt Crisis Aid (DCA) is a UK not-for-profit organisation working in the personal debt advice
sector. It provides free support and assistance to individuals (‘clients’) with financial
problems. DCA is run by a Board of trustees, some of whom are chartered accountants.

Background

A large number of commercial debt management companies exist which charge for the
services they provide. However, for these companies there is often a conflict of interest: the
debt management services which generate the greatest profit for the company are often not
the best course of action for the client who is in debt. As a result, some commercial debt
management companies have been criticised for not treating clients ethically and for charging
high initial fees for services.

DCA was set up in 2005, with backing from the UK central government, to increase the
availability and effectiveness of free, independent debt advice, with a focus on the best
interests of the individual client. DCA’s core activities include:

 providing access to free, independent information and financial/legal advice for clients
with debt problems (face-to-face, telephone and online)

 helping clients to negotiate with lenders to reschedule loan repayments

 providing education and training to clients to develop financial awareness and financial
management skills

 researching issues related to personal debt, the availability and cost of credit, and
financial advice.

DCA’s main source of income is a fixed annual budget provided by the government. This is
awarded in two separate elements: an amount to cover DCA’s overheads (employment and
administration costs) and a separate budget to pay for the cost of financial/legal advice which
is provided to clients by approved external experts. DCA supplements government funding by
raising donations from organisations which benefit from offering credit to consumers,
including a number of large retailers, banks and building societies.

As a publicly-funded organisation, DCA must deliver services efficiently within budget. The
government sets annual targets which include: the number of clients DCA helps each year;
how quickly and successfully those clients are helped; and how efficiently the budget has
been managed. Success is measured using a ‘balanced scorecard’ approach, reporting
against key performance indicators.

Copyright © ICAEW 2012. All rights reserved. Page 2 of 8

Operations

DCA has a small number of its own employees, who are located at 12 regional offices, each
operating independently. When a prospective client approaches a DCA regional office, an
employee undertakes an initial interview to assess the client’s situation. The employee then
refers the client to an approved external expert (an accountant and/or solicitor) who provides
the relevant financial/legal advice. The expert then invoices the DCA regional office for the
services provided.

Accountants and solicitors who wish to undertake work as approved external experts on
behalf of a DCA regional office are required to complete and submit an Approved Expert
Questionnaire, together with supporting evidence, which is assessed by local DCA
employees. To be approved, experts must demonstrate that they meet quality standards, are
capable of delivering results that benefit clients and will make effective use of public money.
Once accepted there is no on-going review process, so an expert can remain on the
Approved Expert List indefinitely.

DCA’s policy states that advice which is likely to cost under £2,000 should be allocated to the
most appropriate approved expert at the discretion of the DCA employee. In all other cases
at least two competitive quotes from persons on the Approved Expert List must be obtained.
A sole practitioner expert, or firm of experts, cannot carry out more than 10% of the total
advice work (by value) provided by a DCA regional office in any financial year.

UK industry environment

DCA has to work within a changing environment and it can be difficult to predict demand for
debt advice services. The number of clients seeking advice fluctuates with the performance
of the economy, interest rates and the cost of credit.

In the last decade, there has been a significant increase in consumer spending on
communications and technology, and on leisure and recreation. Changes in technology have
also led to increasing use of the internet for financial transactions and the purchase of goods
and services. There has been a general trend of decreasing savings and increased spending,
with households using credit cards and other forms of credit to increase their expenditure.
The government is keen to encourage sustainable lending and borrowing and has introduced
regulations to ensure that consumer credit markets operate in a way which is fair.

Copyright © ICAEW 2012. All rights reserved. Page 3 of 8

Future plans

DCA’s core budget is under pressure due to government funding cuts. In addition, from 2012
DCA is subject to an annual cost and quality compliance audit. To demonstrate that they can
increase efficiency and reduce costs, DCA’s trustees have decided to create a central shared
service centre (SSC). The SSC will undertake the screening of all professionals wishing to
become approved experts and will handle all payments to experts - activities which are
currently conducted on a regional office basis. It will also introduce procedures for monitoring
levels of service quality from experts.

DCA will retain a small number of employees at each regional office and the remaining
employees will be asked to apply for roles at the new SSC. It is envisaged that approximately
50% of the current workforce will be made redundant.

To assist with the proposed changes DCA plans to introduce a new information system
including a central database. This will allow Approved Expert Questionnaires to be submitted
and assessed online; it will also allow experts to submit invoices for payment electronically.
Finally it will gather the information required for the government’s balanced scorecard
performance measurement reporting system and the cost and quality compliance audit.

The trustees of DCA have recently been approached by Mary Bourne, the managing partner
of a national chain of solicitors, Longparish LLP. Not all Longparish offices are on DCA’s
current Approved Expert List. Mary has suggested to the trustees that they would be able to
save time and money if, in future, all DCA offices allocated legal advice work under £2,000
directly to her firm. In return, Longparish would produce a single consolidated monthly invoice
for all work undertaken.

Requirements

(a) Explain the political, economic and social factors that DCA’s trustees need to take into
account when developing strategy. (8 marks)

(b) Using Mendelow’s power-interest matrix, identify and justify the position of the following
stakeholder groups for DCA:

 UK government
 External experts
 Clients (8 marks)

(c) (i) Discuss the advantages and disadvantages of the trustees’ plans to centralise
shared services. (7 marks)

(ii) Assuming that the shared service centre (SSC) goes ahead, explain how the
trustees should manage the change. In your answer you should refer to change
management models where appropriate. (8 marks)

(d) Explain what outputs will be required from the information system to enable DCA to
measure performance. (7 marks)

(e) Discuss the ethical and public sector governance issues arising from Mary Bourne’s
proposal to the trustees. (6 marks)

(44 marks)

Copyright © ICAEW 2012. All rights reserved. Page 4 of 8

2. Bootwear plc (Bootwear), a company listed on the London Stock Exchange, specialises in
the production and sale of high quality, waterproof protective footwear (boots and shoes),
originally designed for use by outdoor workers.

Company information

Bootwear products are sold through its own stores and also via specialist outdoor retailers
which sell clothing and equipment for a range of outdoor sports and activities. Over 90% of
people who buy Bootwear footwear are male, the majority of whom are aged 25-35.

Bootwear places great emphasis on corporate social responsibility and sustainable business
practices. The company is publicly committed to reducing its environmental impact.

Future strategic options

Bootwear markets its products as ‘Footwear for life’, reflecting the fact that its boots and
shoes are functional and long-lasting and do not need to be replaced frequently.
Consequently, although the business is profitable, Bootwear needs to expand its customer
base if the business is to grow. It is currently considering two mutually-exclusive acquisition
targets, BHC Ltd (BHC) and MK Ltd (MK):

 BHC is an online retailer of premium-priced sports-style fashion clothing for males and
females. Since its launch in 2005, BHC has created a perception of a luxury lifestyle
brand, based on its classic British heritage. The clothes are targeted at affluent young
people, aged 18-25, interested in traditional sporting and country pursuits such as polo,
hunting, rugby and rowing. BHC specialises in a fast turnover of items. Each season a
new range of products is launched, based on existing designs, but using different colours
and fabrics. Marketing is undertaken via its monthly lifestyle magazine ‘BHC Life’ and the
use of social network sites which promote the latest ‘must-have’ items to BHC’s global
customers. BHC has grown rapidly because its wealthy target market does not appear to
have been significantly affected by the economic downturn. However it has been
criticised in the newspapers for being ‘an over-priced disposable-fashion brand’. BHC’s
majority shareholder is rumoured to be considering benefiting from the company’s
success by selling some, or all, of her investment.

 MK is an established family company which produces a wide range of climbing

equipment, including a small range of clothing for mountaineering. MK products are sold
in the UK to specialist climbing shops. It also has a long-term contract to supply
MK branded goods to a well-known outdoor retailer, Whiteout plc (Whiteout), which
operates a chain of stores throughout the UK. MK invests heavily in marketing by
sponsoring famous climbers. Its brand is recognised in the climbing world for its technical
attributes and safety and, as a result, it has a loyal customer base. MK’s products are
designed in-house but manufacturing has been outsourced to various suppliers in Asia.
MK has an ethical procurement policy and insists on contracts that ensure fair terms and
appropriate working conditions for suppliers and their employees. This means that its
cost base is higher than that of competitors which creates pressure on margins,
especially when there are adverse movements in exchange rates. MK’s senior
management team are all family members, some of whom are hoping to retire soon,
although there is no succession plan in place.

Bootwear is currently conducting a preliminary appraisal of the potential targets. It has not yet
entered discussions with either company regarding the price or the form of consideration,
should it decide to go ahead with an acquisition.

Copyright © ICAEW 2012. All rights reserved. Page 5 of 8

Exhibit

Financial information for all companies for the year ended 31 December 2011 is set out
below:

Bootwear BHC MK
£’000 £’000 £’000

Revenue 23,509 7,028 12,109

Cost of sales 15,385 3,722 9,410
Gross profit 8,124 3,306 2,699
Operating expenses 5,227 1,548 2,256
Operating profit 2,897 1,758 443
Interest 235 54 88
Profit before tax 2,662 1,704 355

Net assets 9,915 2,943 3,903

Debt/Equity 46% 21% 25%

Revenue growth 2010-2011 6% 18% 4%

Requirements

You are a consultant assisting Bootwear with the preliminary appraisal of the acquisition
targets.

Using the data in the Exhibit and the other information provided, prepare a report for the
board which compares the two potential target companies, clearly identifying any further
information required.

Use the following headings in your report:

(a) Strategic fit (10 marks)

(b) Financial performance and other relevant financial issues (14 marks)

(c) Future risks (6 marks)

(d) Preliminary conclusions and recommendations. (4 marks)

(34 marks)

Copyright © ICAEW 2012. All rights reserved. Page 6 of 8

3. Vicaro Ltd (Vicaro) is a small research and development company which was set up in India
by a group of local entrepreneurs. Vicaro develops new business ideas which it normally
commercialises by granting licences to other companies to use its intellectual property within
India and the rest of Asia. Vicaro’s latest development is aimed at making a low-cost
personal computer (PC) accessible for the first time to the domestic Indian population.

PC industry background

The PC industry emerged from the market for mainframe computers - large, costly systems
owned and used by big corporations. The invention of the microprocessor in 1971 led to the
creation of much smaller computers targeted at individuals.

Early PC owners were computer technicians and enthusiasts, who purchased their PC as a
kit of electrical components from which they built their own desktop machine.

The development of colour graphics in the 1980s made it easier for non-technical users to
work with PCs. This created a market for ready-assembled desktop PCs with associated
devices such as a keyboard, monitor, disk drive and printer. Product standardisation gave
rise to economies of scale for the manufacturers and lowered the cost so PCs were an
affordable consumer good, popular for domestic as well as business use.

In the late 1980s the laptop PC was developed, integrating all the components of a desktop
PC into a single portable unit. The advent of the internet in the 1990s made PCs in their
various forms a household item, providing instant access to information. In 1977 48,000 PCs
were sold worldwide, increasing to over 100 million by 2001. This growth continues: in 2010,
the number of PCs in use worldwide was 1.4 billion, forecast to reach 2 billion by 2015.

Laptops have become increasingly popular for both business and personal use and since
2008 the sale of laptops has exceeded that of desktops. Within the last decade, the
popularity of email, social networking, e-commerce and e-reading has given rise to the
development of even smaller PCs and recently the introduction of ‘tablet’ PCs. A tablet is a
hand-held, touch-screen PC, larger than a mobile phone but smaller than a laptop. There has
also been increased competition for PCs from the smartphone - a sophisticated mobile phone
with advanced computing capability and internet connectivity, which can also operate as a
camera and portable media player.

The tablet market is currently dominated by one multi-national company, which sold
14.8 million units in 2010 when it launched its tablet (over 75% in volume of worldwide tablet
sales). Industry predictions suggest that over 25 million people will buy tablets instead of
laptops during 2012. Despite a number of other competitors entering the market in the last
year, the tablet remains a premium-priced product.

The Sibal

Aware that the price of PCs is prohibitive for a large proportion of the domestic Indian
population, Vicaro has recently developed a prototype of a low-cost touch-screen tablet (‘the
Sibal’). The Sibal has an on-screen keyboard, word processor, and internet browser. It runs
on solar power. There is no need to download and install applications on the Sibal, as all
processing and storage is maintained remotely on a server accessed via the internet.

Copyright © ICAEW 2012. All rights reserved. Page 7 of 8

Due to its limited specification and lack of internal memory, the Sibal will cost less than 15%
of the price of other tablets currently on the market. Initial market research in India suggests
that high demand for the Sibal is likely for family and educational use due to its cheap
purchase price, low running costs and ease of operation.

In order to make production viable, economies of scale are required to reduce costs. Vicaro
is currently considering choosing one of the following options for the financing and
commercial development of the Sibal:

(1) Approach a global PC manufacturer which does not currently have its own tablet with a
view to a joint venture. Vicaro would provide the intellectual property in exchange for
access to the partner’s manufacturing and distribution facilities.

(2) Exploit the intellectual property rights by granting a licence to use the technology to
those wishing to manufacture and sell the tablet in India and the rest of Asia.

(3) Create a new company. Finance would be sought from private investors. The Indian
government would also be approached for sponsorship on the basis that the Sibal could
contribute to education and to the growth of the Indian economy.

Requirements

(a) With reference to the industry and product life-cycle models, explain how the personal
computer (PC) industry has evolved. (8 marks)

(b) Explain the issues that Vicaro needs to consider when choosing the appropriate method
of commercial development for the Sibal.

Use the following headings:

 Resources
 Control
 Risks and returns (14 marks)

(22 marks)

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