OPEN UNIVERSITY OF MAURITIUS

PROGRAMME
MOCK EXAMINATION

MODULE NAME

STRATEGIC MANAGEMENT

DATE

MODULE CODE

TIME

DURATION

3 Hours

NO. OF
4
QUESTIONS SET

NO. OF
QUESTIONS TO

BE ATTEMPTED

INSTUCTIONS TO CANDIDATES

(a) This paper is subdivided into 2 sections . Section A and Section

B
(b) Section A is compulsory and carries 40 marks
(c) Answer any 2 question from Section B . Each question carries 30
marks
(d)You are allowed to use a calculator
(e) Reading times : 20 minutes

SECTION A
QUESTION 1(40 Marks)
AutoFone was established almost 20 years ago at the beginning of the mobile
telephone boom. It was formed by a dynamic chief executive officer (CEO)
who still remains a major shareholder of the company.
AutoFone brought two new concepts to the market. First, it established retail
shops where customers could go and handle the products and discuss mobile
phone options with trained sales people. Before AutoFone, all mobile telephones
were sold through the customer directly contacting the telephone network provider
(like conventional home land line services) and were generally aimed at business
rather than leisure users. Second, AutoFone sold products and services from all the
four major network providers licensed by the government to provide
telecommunications services in the country.
The CEO of AutoFone established the retail shops along, in his words,
entrepreneurial lines. He regards each shop as an independent business, having
to achieve a profit target but without being closely monitored within these targets.
He believes that the company is about providing opportunity to its employees,
providing them with autonomy and responsibility to achieve their goals. It is not
about monitoring them every hour of the day, stifling creativity and enthusiasm.
To support this approach, sales staff are given a relatively low basic salary with a
substantial element of profit-related pay linked to the profit targets of the shop.

Commission is also paid to sales staff who successfully sell mobile phone
insurance to the customer. Each shop is relatively small, usually employing three
or four people.
In recent years the CEO has been increasingly involved in television, sports
promotion and charity work. At AutoFone he has established a strategic planning
committee of senior headquarters managers to develop and implement the
companys business strategy. This committee includes the two longest serving
board directors. The strategy still continues to have at its heart the central business
idea of giving independent and impartial advice to customers so that they can
choose the best equipment and network for their needs.
Marketplace trends
Since AutoFones arrival into the market, two significant trends have emerged
However, while the AFDirect and AFInsure divisions are prospering, there are
increasing problems in the retail shops division. Profitability has been declining
over the past few years (see Table 3) and this has had a demoralising effect
on shop employees.
One shop manager commented, in hisexit interview, that the profit targets were
unattainable in the current market. They might have been appropriate in 1997,
but they are not in 2007. Staff are particularly demoralized by spending time
explaining a particular product to a customer who then leaves the shop and buys
the product cheaper on the internet. They have to wait for it to be delivered
(usually two or three days) but they are prepared to do this to gain the lower prices
offered by the direct internet based companies, including AFDirect. It is also
increasingly common for customers who have bought from AFDirect to take their
phones to AutoFones retail shops for support and service. This activity is not
recognised in the shop employees reward package.

AutoFones central city branch

Despite the overall decline in the profitability of the shops, one branch has
continually met or exceeded its profitability targets and is held up by the CEO as
an example of best practice proof that the companys approach to mobile phone
selling can still be profitably applied. This is the central city branch in one of the
countrys most prosperous cities.
The CEO arranged for three members of the strategic planning committee to visit
the shop, posing as customers, to investigate the reasons for the shops success.
They found the staff very friendly and helpful. However, they also found that they
were guided towards products and services which had higher profit margins.
Further investigation showed this always to be the case and so customers were
sold products which were profitable to the shop, rather than those best suited to the
customers needs. On receiving this information, AutoFones board concluded that
this was unethical as it compromised their central business idea which stressed
impartial advice to guide the customers choice. The manager of the shop was
reprimanded and asked to adhere to company policy. He resigned soon afterwards,
followed by his two assistants. The shop is currently run by temporary staff and
profitability has significantly dropped. The licensed network providers have
opened their own retail stores, usually in city centers. AutoFone has reacted to the
opening of these shops by stressing AutoFones independence and impartiality.
Only at AutoFone can impartial advice be received on all four competing networks
and their supporting services. The CEO now refers to this as our central business
idea and, as well as being core to their strategy, it is heavily emphasised in all
their promotional material.
(ii) Mobile phones have become more sophisticated. Many now offer integrated
cameras, mp3 players, web browsers and email facilities. AutoFone offers these
products in both its shops and through its internet operation. Mobile phones are

either purchased outright or provided on monthly contracts. The minimum

contract period with the network provider is usually 12 months.
AutoFone has itself established its own internet division, AFDirect, as a separate
division within the group. It has also established an insurance division (AFInsure)
offering insurance to cover loss or damage to mobile phones purchased from the
company. Revenue earned from each division, analysed by the age of the customer,
is shown in Table 1 . Analysts agree that growth in the mobile phone business is
slowing down and this is supported by the figures given in Table 2 showing
revenue from sales (both retail and Internet) for AutoFone and its competitors, the
four licensed network providers, for the period 20032007.
Future strategy
The two longest serving directors on the strategic planning committee are
increasingly concerned about the companys decline in profitability (see Table 3).
They have written an internal paper suggesting that the retail division should be sold
off and that AutoFone should re-position itself as an online retailer of phones. They
believe that the retail shops business model is no longer appropriate. They argue that
a company concentrating solely on Internet sales and insurance would be a smaller
but more profitable and focused business. The CEO is strongly opposed to this
suggestion because it was the shop-based approach to selling mobile phones that
formed the original business model of the company. He has a strong emotional
attachment to the retail business. The two directors claim that this attachment is
clouding his judgment and hence he is unable to see the logic of an

economically justifiable exit from the retail business.(See Table 3)

Table 1 : Analyisis of AutoFone Dales : Sales ( All figures in Rs M)

Age of customer

Under
15

15
25

2640

41
60

Over
60

Total

Division AutoFone
retail shops

90

60

120

65

340

AFDirect

15

20

45

Total sales of mobile

phones
AFInsure

385
0

14

Group total

399

Table 2: Market Analysis (all figures in Rs m) of sales of mobile phones

Company

2007

2006

2005

2004

2003

AutoFone

385

377

367

340

320

NetAG

350

348

345

340

305

09Net

390

388

380

365

350

PhoneLine

315

315

315

305

300

NetConnex

295

295

294

290

285

Total

1,735

1,723 1,701

1,640 1,560

Table 3: Other relevant statistics for AutoFone

Company

2007

2006

2005

2004 2003

Number of employees

1400

1375

1325

1300 1275

Profit before Interest and

Tax

11

30

35

37

Capital Employed

205

205

205

205

204

Return on capital
Employed

4.4

14.6

17.1

18.1

Gross Profit Margin

(%)

26

25

23

22

22

Net Profit Margin (%)

11

12

Required :
(a) Using an appropriate model or models, analyse the competitive environment of
AutoFones retail shops division.

(20 marks)

(b) AutoFones CEO is anxious to develop a rational and well argued case for
retaining the retail shops division. Write a briefing paper for the CEO to submit to
the strategy planning committee explaining why the retail shops division should

continue to form a key part of AutoFones future strategy.

SECTION B
QUESTION 2 ( 30 marks)

(20 marks)

XZY, a publicly quoted company has expanded rapidly since its formation in 2005. Its
rapid growth rate, based on a broad range of well-regarded products manufactured
and sold exclusively within Asia, has led to high profits and an ever increasing share
price. However, in the last year, XZY has found its growth rate difficult to sustain.
XZYs core strategy has been described by its CEO as selling what we know to who
we know. However, this view has been criticised by a number of financial analysts
and journalists who have warned that if XZYs growth rate is not maintained its
share price will fall and the value of the company will reduce. XZY has a functional
organisational structure and currently employs around 800 employees. The number
of employees has grown by 20% since 2008.
The Human Resource Director of XZY has suggested that she carries out a review of
XZY with the purpose of saving a significant amount of money by reorganising the
company and reducing employee numbers. In this way, she considers she would be
making a contribution towards maintaining XZYs profit growth rate.

The CEO is interested in this idea but he is aware that changing organisational
structure can be difficult. The CEO knows from his previous experience that
such reorganisations do not always achieve their intended results
Required
(a) Evaluate, using Ansoffs product market scope matrix, the alternative strategies
XZY could follow to maintain its growth rate in profits and share price.
Note: Ansoffs model is also described as the growth vector matrix. You are not
required to draw this model.
(15 marks)

(b) Advise the CEO of the difficulties which may be encountered in changing the
organisational structure of XZY and reducing employee numbers. (15
marks)
QUESTION 3 (30 marks)
JGS is a long-established retailer which specializes in the sale of antiques. JGS is
owned by a married couple who both work in the business. They have no
employees. Their premises consist of a large modern shop and there is an
apartment above this in which the owners live. Over the last five years the local
area has become very fashionable and the shop is now surrounded by smart
restaurants, cafes and up-market fashion outlets. This area has also become a very
popular place to live which has meant that property values have increased
substantially. The owners believe that if they disposed of their premises, they
would make a substantial capital gain. The owners have noticed that the fixed
costs of their property, including insurance, local tax, security and maintenance
have risen very sharply during the last five years.
Since establishing the business , the owners have developed their expertise in this
line of business . They now have a national reputation in the antiques trade and
many repeat customers. They traded profitably between 1980 and 2008 but in the
last year have made an operating loss for the first time. The owners are often
consulted by other antique traders and collectors by letter and telephone and they
have developed a considerable income stream by charging for their advice.
However, they have found that their location is becoming increasingly
problematic. Although the popularity of their area of town has increased and led to
many more people living and visiting the area, unfortunately for the owners most
of these people are not interested in antiques. They are young people who like the
area but do not have the disposable income to spend on antiques.

A further problem is that the shop is not situated in a large city and it is very
inconvenient for many antique traders and collectors to visit. The owners believe the
location has recently restricted the success of their business. The owners know that a
very popular development in the antiques trade has been the establishment of
Antiques Fairs where antiques are bought and sold. Some of these have
established international reputations and have many thousands of visitors.

However, because of JGSs location and the need to keep their shop open, the
owners do not attend these. The owners recently set up a website which has basic
information about their business on it such as their address, telephone number
and the opening times of their shop. The website has received a large number of
hits but it does not seem to have increased sales.
* Antique = a decorative object that is valuable because of its age.
(Oxford Concise Dictionary)

Required :

(a) Analyze the strengths and weaknesses of JGS using the value chain model.
(15 marks)
(b) Evaluate how the introduction of e-commerce could affect JGSs value chain.
(15 marks)
Note: You are not required to draw a value chain diagram in any part of your
answer to this question.

QUESTION 4 (30 marks)

XYZ is a privately owned company which manufactures industrial chemicals. The
manufacturing process produces large quantities of waste and is very noisy and
smelly. XYZ sources some of its raw materials from economically underdeveloped
countries. XYZ has an ethnically diverse workforce. XYZ has always tried to stay
within its country's laws.
However, recently there have been a number of accidents which XYZ's safety
manager thinks were due to operator error. XYZ would like to be listed on a stock
exchange as this would provide access to capital which would assist XYZ's plans
for expansion. XYZ does not have a policy for Corporate Social Responsibility
(CSR). However, XYZ's auditors have advised XYZ that a CSR policy would be
required if it is to be listed.
Note from Auditors:
XYZ could benefit because companies with an active CSR focus are ranked by
two major indexes. The FTSE4GOOD index series measures the performance of
companies that meet globally recognised CSR standards and is designedto
facilitate investment in these companies (FTSE 2010). The Dow Jones
Sustainability Indexes track the financial performance of the leading
sustainability driven companies worldwide. These indexes provide asset
managers with reliable and objective benchmarks to manage sustainability
portfolios
Required:
(a) Advise XYZ of the benefits of a CSR policy.

(15 marks )

(b) Recommend the contents of a suitable CSR policy for XYZ dealing with its
manufacturing process, procurement policy, labour force and compliance with the
law.

(15 marks)

MODEL ANSWER

QUESTION 1(40 Marks)

(a) Using an appropriate model or models, analyse the competitive environment of
AutoFones retail shops division.

(20 marks)

Step 1
So, you have to analyse the competitive environment. Probably the best tool is
Porters five forces, but there is no reason why PESTEL could not also be used
where appropriate, or even SWOT. Therefore, you should be ready to read through
the scenario, annotating it as you go (eg: C = competitors, B = buyers, Sup =
suppliers, N = New entrants, Sub = substitutes. Similarly for PESTEL).
Step 2 : Table 1 shows how relatively unimportant both AFDirect and AFInsure
are to the business so far. The analysis by age of customer shows that younger
people are relatively keen on buying over the internet. As internet-savvy people
age, this branch of the business is likely to become more important at the expense
of the retail shop division.

Table 2 shows how the mobile phone industry has changed from a growth rate of
5% 03/04 to only 0.7% 06/07. The only way for a firm to get bigger is to gain
market share so rivalry will become more intense. AutoFone has managed to
increase its market share from 2003 to 2007 and itself enjoyed growth of 2%
06/07.
Table 2 shows five competitors of roughly equal size (oligopoly). Price reductions
by one have to be followed by others to maintain their market shares a potentially
unstable setup
Answer plan
(i) Potential entrants: low threat: providers already in market; other entrants
would be given poor deal
(ii) Suppliers: hardly any bargaining power (30-year contracts)
(iii) Rivalry: providers; equal sizes; technology allows rivalry over internet
(iv) Bu yers: little customer loyalty despite claim that AutoFone is impartial
(v) Substitutes: none known for the phone function
(vi) Market conditions: low growth = high competition;
(vii)Technology = internet competition.
(b) AutoFones CEO is anxious to develop a rational and well argued case for
retaining the retail shops division. (20 marks)
Write a briefing paper for the CEO to submit to the strategy planning committee
explaining why the retail shops division should continue to form a key part of

AutoFones future strategy

You are not asked to say if the retail shops division should remain important, you
are asked to justify why it should.
By now you will be familiar with the question, but will need to skim again in
the light of the requirements. Look for reasons to keep the retail shops and ways
of refuting the two directors paper.
Step 3: Financial data.
The retail shops contribute 85% of the companys total
turnover and 88% of mobile phone sales.
Retail shops are still profitable
Return on Capital Employed
Gross profit percentage

2007 = 5% (11/205); 2003 = 18%

2007 = 26%; 2003 = 33%

Net Profit percentage

2007 = 3%; 2003 = 12%

Answer plan
A change in approach to pushing more profitable phones would increase profits
(though perhaps at the expense of the companys reputation).
Shops are on long leases so there could be substantial exit costs.
Retail shops are still profitable.
Retail shops are by far the largest part of the business.
The brand is based on the reputation of the shops and this may be linked to the
success of the internet and insurance businesses.

SECTION B
QUESTION 2 ( 30 marks)
(a) Evaluate, using Ansoffs product market scope matrix, the alternative strategies
XZY could follow to maintain its growth rate in profits and share price (15
marks).

Ansoff has four cells in his matrix which is formulated with axes based on:
present and new products
present and new markets
The CEO has described XZYs strategy as being based on selling what we know
to who we know. Although this has been a successful strategy in the past in terms
of profitability and share price, XZY is now finding growth difficult to sustain.
This suggests that one of the cells of the matrix, Market Penetration, is
approaching the point where it cannot offer any further growth to XZY.
In the context of Ansoffs matrix the remaining options are:
Product development: this implies the launch of new products to existing
markets. XZY would need to analyse the cause of its reduced growth. If it is
because its existing products are coming to the end of their life-cycles, then
launching new products in its existing markets could be an appropriate way
forward.

If the slow-down in growth is due to some structural problem with Asian markets,
for example recession, then offering new products to existing markets may not
restore growth.
Market development: this option would mean that XZY would offer its existing
products to new markets, for example Australia and Europe. This would be
appropriate if the products were still vibrant and the reason for the slow-down in
growth was that the Asian markets had become saturated or were suffering from
structural problems.
Diversification: according to Ansoffs matrix XZYs remaining option would be
to diversify which would commit XZY to making new products for new markets
which could restore growth; for example, XYZ could offer a business service
within Europe.
Each of the options above implies moving into new areas, to a greater or
lesser extent, and so represents increased risk for XZY with diversification
being the riskiest.
The CEO, who has a fiduciary duty to act in the best interest of XZYs shareholders,
should examine whether it is necessarily a bad thing if the companys growth rate
slows down. It could be better from the shareholders viewpoint than the endless
pursuit of growth which, in the long-term, is an unrealistic aspiration.

(b) Advise the CEO of the difficulties which may be encountered in changing the
organisational structure of XZY and reducing employee numbers. (15 marks)
The CEO will have the following difficulties to deal with:
As the reorganisation is aimed at reducing headcount, staff will resist change
either informally by negotiation and lobbying or perhaps formally by recourse
to legal action.

 Many reorganisations do not fulfil their objectives and the new structure may
damage XZYs profit. This may occur as the workload may not reduce but will
have to be carried out by fewer staff and this could result in poorer quality. This
could adversely affect XZYs share price.
The reorganisation and its attendant difficulties may distract XZYs management
from its normal business and its customers might suffer as a result.
The reorganisation may not be tackling XZYs underlying problems, for example,
that its products are at the end of their life-cycles or that the Asian market has
structural problems. Thus, the CEO might be misled into putting his attention in
the wrong areas.
Although the reorganisation is designed to save money, in the short term it will
cost money and the financial benefits may take longer to emerge. There is a
possibility that the reorganisation might, in the short term, produce the opposite
result to that which is intended.
QUESTION 3 (30 marks)
(a) Analyze the strengths and weaknesses of JGS using the value chain model.
(15 marks) .
Primary activities
Inbound logistics No information given, so unable to classify this.
Operations The business has outgrown the need for shop premises. The owners
are unable to attend antiques fairs which have very good business potential.
WEAKNESS.
Outbound logistics The assumption is that storage and distribution is carried out at
the shop premises. Mention was made in the case of the increasing cost of security,

as the antiques require protection from theft. It could be that the shop premises are
no longer the best place to store and distribute antiques.
Possible WEAKNESS.
Marketing & Sales The owners used to gain their business because of their
location, but this is no longer as important. Latterly, they have built up a reputation
and have many repeat customers. However, their use of the Internet is primitive
and does not contribute to their business.
This was a strength now turning into a WEAKNESS.
Service As the owners have a national reputation and many repeat customers, this
is classified as a STRENGTH.
Support Activities
Firm infrastructure The owners have had a long history of profitable
trading. However, recently they have made losses.
WEAKNESS.
The owners premises, if sold, would enable them to realise a substantial capital
gain.
STRENGTH.
Human Resource Management The owners work in the business and there are no
employees. Their long survival in the business and their reputation as experts are
STRENGTHS.
However, the people are the business and there is little possibility of succession.
Further if the owners have been in business since 1980 they may be
approaching retirement age. WEAKNESS.

Technology development This seems to have been neglected. See Marketing &
Sales.
Procurement No direct evidence of this but longevity of business suggest that
this has been a STRENGTH.
(b) Evaluate how the introduction of e-commerce could affect JGSs value chain.
(15 marks)_
A move to e-commerce for the owners would affect the value chain of the owners
in the following ways. If trading via the website takes off, the owners do not need
to keep their shop. They will no longer be tied to a specific location and they
could move their business. They will also save money on the shops fixed costs if
they relocate to a cheaper area. Thus, their Operations will have altered.
The Outbound logistics of the business will be affected in a similar way
to Operations.
Marketing & Sales: e-commerce represents a new way of doing business. It
should lead to increased business as the owners are no longer subject to
geographical boundaries and their antiques will be displayed on the web.
Firm infrastructure: the change to e-commerce could mean that the owners
could return to profitability. They will also be able to realise their inherent capital
gain on disposal of the shop and should benefit from an injection of cash.
Human Resource Management: e-commerce implies a new way of working for
the owners. They can now attend fairs and travel which they have not been able
to do previously as they will no longer be tied to their shop.
Technology development: with the adaption of e-commerce this aspect of the
value chain will now be an important part of the business.

Procurement: the owners new website will put them in touch with a greater
number of customers. This could give them access to new sources of supply
of antiques
QUESTION 4 (30marks)
(a) Advise XYZ of the benefits of a CSR policy.

(15 marks )

If XYZ produces a policy for Corporate Social Responsibility (CSR), there are a
number of possible benefits it could receive. XYZ wishes to be listed on a stock
exchange because this would give it access to capital and XYZs auditors have
advised it that a CSR policy is a requirement of listing. In addition to this direct
benefit, XYZ could benefit because companies with an active CSR focus are
ranked by two major indexes. The FTSE4GOOD index series measures the
performance of companies that meet globally recognised CSR standards and is

designedto facilitate investment in these companies (FTSE 2010). The Dow

Jones Sustainability Indexes track the financial performance of the leading
sustainability driven companies worldwide. These indexes provide asset
managers with reliable and objective benchmarks to manage sustainability
portfolios If XYZ has a CSR policy, it would enable it to be ranked on these two
influential Indexes which could increase its attractiveness to ethical investors.
Research studies conducted in the late 1990s have indicated that companies
investing in CSR have good financial performance. One view of company
performance suggests this depends on the amalgamation of physical, human and
organisational assets it offers to the external environment. XYZ, by following a
CSR policy, can nurture and develop sustainable relationships with its
stakeholders. If these relationships are difficult for other companies to imitate, then
XYZ will have created competitive advantage for itself. XYZ, in its pursuit of

CSR, is acknowledging the needs of a wide group of stakeholders; that is, it

regards itself as having responsibilities which are wider than those which it owes to
its shareholders. This acknowledgement should bring two benefits to XYZ: it
should foster good relationships with its stakeholders and this should enhance
XYZs reputation. Investing in stakeholder relations will promote loyalty to XYZ
from its suppliers, staff and customers. This can lead to further benefits, for
example, loyal staff are likely to want to stay working for XYZ so staff turnover
will reduce which, in turn, reduces costs. If XYZ establishes a good reputation for
its CSR policy, this will make it an attractive place to work and help it recruit high
quality workers. In order to implement a CSR policy, XYZ will have to acquaint
itself with its stakeholders preferences. This implies that XYZ will inform itself of
changes in external regulations, technology and social attitudes. This awareness
will be of assistance to XYZ's management of both internal and external risk.
(b) Recommend the contents of a suitable CSR policy for XYZ dealing with its
manufacturing process, procurement policy, labour force and compliance with the

law

(15 marks)

In its formulation of a CSR policy, XYZ should include sections dealing with the
following matters:
Waste: As XYZs manufacturing process produces large quantities of waste it
should consider how this is disposed of and the extent to which any of the waste
is recyclable. The production of the waste will have involved the use of resources,
such as energy, so XYZ should ensure that there is no unnecessary waste.
Noise: XYZs CSR policy should acknowledge the existence of the noise which it
creates and describe how noise will be managed. Noise may not only affect XYZs

employees but noise pollution may contribute to environmental degradation in the

area surrounding XYZs premises.
Smell: the same considerations which apply to noise pollution apply to the
odour pollution created by XYZs process.
Raw material procurement: As XYZ sources some of its materials from
economically underdeveloped countries, XYZs CSR policy should delineate the
terms upon which this business is conducted. The CSR policy should state XYZs
desire for equitable trading relationships with its suppliers and might include the
aspiration to be a Fair Trade partner.
Workforce: XYZs CSR policy should include a statement about how it deals with
equality of treatment for its workforce. Additionally, because XYZ has
experienced a number of accidents recently, XYZ should make a commitment to
workplace safety.
Compliance: XYZ has always tried to obey its country's laws which is
commendable. CSR implies that companies will exceed their legal
responsibilities if necessary. However, it would be appropriate for XYZs CSR
policy to acknowledge its willingness to comply with the law