Institute of Certified Management Accountants of Sri Lanka

Business Strategy & Policy (BSP / SL 2 – 402) – Strategic Level

May 2013 CMA Examination
Suggested Answers

Instructions to candidates
 Time allowed is three (3) hours
 Total marks: 100
 Answer all questions in Part 1 and three (3) questions from Part 11

Part 1
Answer all questions.
Read the following case and answer the questions given at the end of it.

Colgate-Palmolive Oral Care Business in Sri Lanka

Founded in 1806, Colgate-Palmolive has been recognised as the global leader in oral care for well over
one hundred years. Colgate is a truly global company serving billions of people around the world with
consumer products that help make their lives healthier, cleaner, and more pleasant. Colgate serves global
consumers with products in some major categories: Oral Care, Personal Care, Household Surface Care,
Fabric Care, and Pet Nutrition. The Oral Care division is concerned with three different kinds of products,
Toothpaste, Toothbrushes, and Mouth Rinses. Oral Care is the most profitable category of Colgate total
sales. These achievements are possible because Colgate consistently demonstrates superiority in meeting
professional and consumer needs for oral care products. More than 40 per cent of toothpaste and 25 per
cent of toothbrushes sold around the world carry the Colgate name. Throughout Colgate’s oral care
history, the constant goal has been to improve oral health through superior technology and ongoing
patient education programmes. Colgate provides leadership in establishing and maintaining worldwide
oral health education programmes. Colgate literally taught many of the world’s people how to brush and
care for their teeth. It is identified that millions of children take part in Colgate programmes. In the USA,
the ‘Bright Smiles, Bright Futures’ educational programmes and materials are designed to help dental
professionals, and elementary school teachers bring good oral health to the next generation of American
children. Today, Colgate continues to deliver products and services that improve the oral health and
overall quality of life for consumers everywhere. Colgate achieves continued innovation by linking the
health of consumers with the latest research findings and technological advances in dental science. Thus,
Colgate has long recognised the value of maintaining a firm partnership with the worldwide professional
dental community, as well as the wisdom of a substantial investment in professional education, clinical
research, and technology.

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Since the early 1900s, when the company began its expansion throughout the world, the mission
statement of Colgate was one word – quality. Colgate applied its strategic ideal of quality to everything it
did. It always made heavy investments in research and development in order to find the right product to
meet consumer needs.
Products manufactured by Colgate-Palmolive in the Sri Lankan oral care sector consist of two main lines:
 Products addressed to the big distribution and independent stores
 Products addressed to the specialised channels
Each product line is composed of several sub-lines. Colgate-Palmolive, as a product strategy, tends to
lengthen the life cycle of each product line in order to attract consumers with different needs and tastes,
and to give an image of completeness of the product line. At the same time it adds several variations to
some single products, increasing the number of products for every brand. Toothbrushes are offered in
different shapes and colours, mouth rinses in the half-litre size only. The segmentation operated by
Colgate-Palmolive in the toothpaste market depends on the attitude/interest the consumer has towards oral
hygiene practices. This is a factor depending on the education level, the age, and the social and economic
level.
In the oral care market, brand loyalty was very low; seldom did consumers buy the same product and the
tendency was towards a diversification of the purchase. In this situation, advertising, especially on
television, becomes a central point, absolutely important for the consumer who is also influenced by the
packaging. In fact, over the last few years it has been experiencing an evolution mainly concerned with
the material utilised. It has shifted from a metallic tube to a soft plastic one which is lighter and more
manageable. More recently, the dispenser was the most important innovation and consumers found it
attractive, which increased demand as soon as it was marketed. It is not easy to delineate the classic
Colgate consumer’s profile due to the low brand loyalty existing in this field. Nevertheless, the 18–34 age
group remained Colgate’s main target market since this was the group most interested in purchasing oral
care products.

Towards the future in Sri Lankan Oral Care Market

In Sri Lanka, Colgate shares the market with several large competitors such as Unilever, Procter &
Gamble, and some local brands. The future in this country appears complex as well as interesting. In the
entry, Colgate’s management faced the problem of how to increase its market share in Sri Lanka. For the
oral care segment, characterised by a continual launch of new items, keys to success were distributed in
two functional areas: in the R&D department product innovation was the determinant, while in the
marketing area a good relationship with the distribution channel was important. Some executives argued
that to keep pace with new trends, the introduction of new items with additional characteristics rather than
the usual products always carrying the same features became critical to success. These innovative
products, in the toothpaste segment especially, could present a dramatic increase in the preventive action
against cavities, or they could be natural products. Other managers argued that the innovative engagement
had to focus on the packaging, through new shapes, new materials, and graphic variants. Others said that
a standardised package could be considered a true innovation by the consumers. Some other executives
argued that a good choice would be to create more products carrying new brand names to be sold in the
mass-market channel, trying to copy Unilever’s strategy. In fact, the toothpaste market in the mass-market
channel is extremely crowded; consequently new opportunities to increase the business come from other
segments such as toothbrushes and mouth rinses. For the toothbrush market, some managers said that
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sales within this segment could double, and this could occur through a sensitive advertising campaign
aimed at making the consumer aware of the importance of a necessary toothbrush change every 3–4
months, as dentists suggest. Other executives thought the right strategy to pursue would be the aesthetic
route through new shapes or even new materials. Some managers argued that, like toothpaste, a
standardised shape for the toothbrush to become ‘the classic Colgate shape’ could represent a good
alternative. These alternatives include a different economic expectation for this segment, and each
proposal has to be thoroughly evaluated by the top management. For the mouth rinse segment, some
executives argued that Colgate should produce therapeutic rinses only or just cosmetic rinses. Others said
the company had to manufacture both. Some other managers thought the right way would be to offer
different sizes as opposed to the current one size. In short, management is considering ways in which
Colgate can differentiate itself from its competitors and improve its strategic position in the long run.
In 2011 the future for Colgate-Palmolive looked just as promising as the recent past had been successful.
In developing a strategy for its Sri Lankan business unit, in the light of the intense competitive market
Colgate’s planners were concerned with answering several questions: How effective strategists can be
derived to position Colgate to take advantage of opportunities and overcome threat? What is the scope of
Financial Strategy at Colgate-Palmolive? How importance the analysis of value chain analysis for
Colgate-Palmolive?

a) Distinguish strategy formulation from position audit. (6marks)

Suggested answer:
Strategy formulation concerns about developing a corporation’s mission, objectives, strategies
and policies
Position audit identifies Strengths & Weaknesses: Firm’s current resources, products, customers,
systems structure, results, efficiency and effectiveness

Marks should be allocated as,

3 marks for strategy formulation
3 marks for the position audit

b) ‘Effective strategists can use the Porter’s five forces framework to identify how to position itself
to take advantage of opportunities and overcome threat’.
What are the main types of forces that shape the competition in the oral care industry?
(2 marks)
Explain in detail how any one of such category of forces contributes to industry level competition
in oral care industry. (8 marks)
Suggested answer:

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 2 marks for each force: at least four forces are to be given/ otherwise no marks
8 marks for the discussion/ see how the answer incorporates the oral care industry with the five
forces
c) Briefly explain the role of Management Accounting at Colgate-Palmolive. (6 marks)

Suggested answer:
Role of Management Accounting include:
• Breaking down of cost/expenditure into functions and processes to facilitate cost control
at each operational level.
• Developing standards for all operating areas and evaluating actuals with the standards.
• Analysing overall business and operational data.
• Suggesting alternatives to improve productivity.
• Identifying areas of wastages, leakages and inefficiencies or invisible losses.
• Ensuring optimum utilisation of available resources.
• Deploying informatic tools for an efficient management information system.
• Contributing to Total Quality Management (TQM).
• Assisting in decision-making process at all cadres of management

1 mark for each point: maximum 6 marks

d) “The value chain defines where the value is added in an organization”. Explain the concept of
Value Chain Analysis with a graphical presentation and discuss the importance of value chain
analysis for Colgate-Palmolive. (12 marks)

Suggested answer:
The value chain describes the activities within and around an organization which together create
a product or service. Primary activities are directly concerned with the creation of a product and
can be grouped into five main areas. Support activities help to improve the effectiveness or
efficiency of primary activities. 4 marks

4 marks for the graphical presentation and discussion of the difference between Primary and
Supportive activities: If graphical presentation is not given and the activities are okay with the
discussion (all primary and supportive activities are given), give 4 marks.

4 marks for the discussion on the importance

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 Importance:
• With Value Chain Analysis, the company can achieve
• Cost advantage: by better understanding costs and squeezing them out of the
value-adding activities.
• Differentiation: by focusing on those activities associated with core competencies
and capabilities in order to perform them better than do competitors.

e) If you suggest that the Colgate-Palmolive to concern for Strategic Management, what benefits of
Strategic Management for Colgate-Palmolive would be possible. (6 marks)

Suggested answer:
 Proactive in shaping firm’s future
 Initiate and influence firm’s activities
 Formulate better strategies
 Improvement in sales
 Improvement in profitability
 Productivity improvement
 Improved understanding of competitors’ strategies
 Enhanced awareness of threats
 Reduced resistance to change
 Enhanced problem-prevention capabilities

(Alternative answer: If students go with the strategic planning)

 Identifies risks-Strategic planning helps in managing these risks
 Forces managers to think-Strategic planning can encourage creativity & initiative by
tapping the ideas of the management team.
 Forces decision making-organizations can not remain static-they have to cope with
changes in the environment.
 A strategic plan draws attention to the need to change & adopt, not just to stand still and
survive
 Better Control-Management Control can be better exercised if targets are explicit.
 Enforces consistency at all levels-Long-term, medium-term & short-term objectives,
plans & controls can be made consistent with one another
 Time horizon-Some plans are needed for the long-term
 Co-ordinates-Activities of different business functions need to be directed towards a
common goal.
 Clarifies objectives-Managers are forced to define what they want to achieve
 Allocate Responsibility- A plan shows people where they fit in

1 mark for one point/ maximum 6

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Part 11
Question number 02 (20 marks)

The financial analysis of Amahara PLC reveals that the company is at a great success. The company had
an annual revenue of Rs.14 million by mid-2011. In addition, it has revealed that these revenues are still
growing by more than 20% a year. The total number of active customers has risen steadily too. Its
customer base is very large indeed.
‘Performance analysis is critical in internal environment analysis

a) ‘Performance analysis is critical in internal environment analysis’. What do you understand by

performance analysis and what techniques can be used for such an analysis? (6 marks)
Suggested answer:
2 marks for the interpretation: Performance analysis is about the evaluation of the overall
performance of the business.
4 marks for the techniques- 1 mark for one:
 Historical analysis-: How have the resources deployed in the business changed over time?
 Industry norm analysis - How do the resources and capabilities of the business compare with
others in the industry?
 Benchmarking- How do the resources and capabilities of the business compare with "best-in-
class" practices?
 Ratio analysis - How has the financial performance of the business changed over time and
how does it compare with key competitors and the industry as a whole?

b) Define the external environment and briefly explain the external environmental forces.
(8 marks)
Suggested answer:
2 marks for the definition: external environment can be defined as forces and institutions outside
the organization that potentially affect an organizations performance.

6 marks for the clarification: The external environment can be subdivided into two elements
Micro/Task Environment-The task environment consists of all the outside organizations, group
and individuals that affect the achievement of organizational objectives- 2 marks out of 6
Macro (the general or far) environment relates to PEST factors in the environment affecting all
organizations: political-legal factors;social and cultural factors; economic factors and
technological factors- 4 marks out of 6

c) Discuss Product Development and Market Development as possible alternative strategic options
to pursue growth, in relation to Amahara PLC (6 marks)

Suggested answer:
Market development provides the ability to:
• Capture a larger market share
– Market saturation
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 – Market penetration
• Develop new uses and/or markets for current products

Product Development provides the ability to:

• Develop new products for existing markets
• Develop new products for new markets

Marks to be allocated as follows,

Abilities of market development- 3 marks/ 1 point for each
Abilities of product development- 3 marks/ 1.5 point for each

PLEASE REFER THE COMMENTS

Kindly provide an answer in line with page 80 of the study pack because students will base their answer
on this material

Question number 03 (20 marks)

Nikers has 5 business units, with activities varying from office furniture, business stationary, food,
transport and electronics. Thus, the management of Nikers is in the view of the prospects of each
business, with the concerns of the core competency bases tied up in each. The core competency analysis
is used to give a perspective to top-level discussions about the future shape of the business.

a) Explain the key features of ‘Core Competency’ to be competitive? (10 marks)

PLEASE NOTE
Please reword the above question: (the answer does not reflect the material in the study text)
Suggested :
Briefly explain the concept of ‘core-competencies’ and the factors that help to identify core-competencies
in any business. (10 marks) (please be guided by pages 40 and 41 for the model answer.

Suggested answer:
 Valuable: Capabilities that either help a firm to exploit opportunities to create value for
customers or to neutralize threats in the environment
 Rare: Capabilities that are possessed by few, if any, current or potential competitors
 Costly to Imitate: Capabilities those other firms cannot develop easily, usually due to unique
historical conditions, causal ambiguity or social complexity
 Non substitutable: Capabilities that do not have strategic equivalents, such as firm-specific
knowledge or trust-based relationships
Marks allocation is as follows;
2.5 marks for each point- with the discussion
If not explained give only 1 mark for a point

Alternative answer

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  Expertise for having clear distinctive brand proposition that focuses solely on a closely-
defined customer group
 Expertise for leading direct marketing skills - database management; direct-mailing
campaigns; call centre sales conversion
 Skills in customer relationship management
 Skills in organizing the resources uniquely.
Marks allocation is as follows;
2.5 marks for each point- with the discussion
If not explained give only 1 mark for a point

b) Briefly explain the ways in which the value to customers can be increased and competitive
advantage gained in terms of cost efficiency? (10 marks)
 Design and engineering
 Conversion technology
 Quality assurance
 Distribution
 Administration
 Inventory and materials

Alternative answer might be focused on economies of scale, economies of scope, and economies
of experience like cost drivers i.e. sophisticated technology use.

Note that the answer should explain these factors.

2 marks per a point (with a discussion)/ 10 marks for 5 points

1 mark per a point if no discussion/ 5 marks for 5 points

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Question number 04 (20 marks)

“ABC: an effective strategy

GGG is a company within the XYZ Group, Sri Lanka’s largest fashionable shoe producer and is a name
familiar to all Sri Lankan youngsters, yet it has a short history. It came about through the drive and
innovative approach of Mr. Goerce, the head of GGG. The GGG’s first strategy to work with its
customers to standardize parts in order to increase volume and reduce costs was not a success. As such,
GGG’s new strategy was much more innovative, as in effect the opportunity he saw was to create a new
segment at the lower end of the market, with the shoe becoming a fun and fashion item, cheap enough to
enable a consumer to own more than one, and for it to be replaced if it went wrong. The target market was
the young and stylish, which was very different from the profile sought by other cheap shoes. This
creative thinking was also applied to a different design, made mainly of rubber and plastic, and using only
part of the conventional shoe. At present the GGG has been a continuing success, and provided an
example to the Sri Lankan shoe industry in demonstrating that decline could be reversed. Indeed, the
concerns about corporate directional strategies are a must in developing effective strategies”.

a) What corporate directional strategies can be considered for GGG? (7 marks)

Suggested answer:
 Growth: Vertical, horizontal, concentric diversification, conglomerate diversification.
 Stability: pause/ proceed with caution, no change, profit
 Retrenchment: turnaround, captive company, sell out/ divestment, liquidation/bankruptcy

1 point without explanation would give 1 mark/ maximum 3 marks just for the strategies
Growth strategy- with full answer- 2 marks
Stability strategy with full answer- 2 marks
Retrenchment strategy with full answer- 3 marks

b) ‘Financial concerns are also central to strategy implementation’. Briefly describe the essentials
for implementation of financial strategy at GGG. (8 marks)
Suggested answer:
 Investment decision
 Working Capital Decision
 Dividend Decisions
 Capital Structure Decisions

2 marks for 1 point

c) What are the uses of ‘Balanced Scorecard’ for GGG? (5marks)

Suggested answer:
 Strategy evaluation & control technique
 Balance financial measures with nonfinancial measures
 Balance shareholder objectives with customer & operational objectives
2 marks for 1 point/ 5marks for 3 points

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Question number 05 (20 marks)

a) ‘Organizational structures are deliberately designed as to allocate value developing tasks and
roles to the employees and state how these tasks and roles can be used to achieve competitive
edge’. Briefly discuss the advantages and disadvantages of divisional organizational structure.
(6 marks)
Suggested answer:
Advantages
 Quality products and customer service –As functions are able to focus on their activities on a
specific kind of good, service, or customer, this helps a division to create high-quality
products and provide high-quality customer service.
 Facilitates communication – this helps improve decision making between functions, thereby
increasing performance.
 Customized management and problem solving - A geographic structure puts managers closer
to the scene of operations than are managers at central headquarters. Thus regional
divisions are often able to find solutions to region-specific problems and to use available
resources more effectively than are managers at corporate headquarters.
 Facilitates teamwork - People are sometimes able to pool their skills and knowledge and
brainstorm new ideas for products or improved customer service.
 Facilitates decision making - As divisions develop a common identity and approach to
solving problems, their cohesiveness in- creases, and the result is improved decision making.

Disadvantages
 High operating and managing costs
 Poor communication between divisions
 Conflicts among divisions

Marks should be allocated as,

3 marks for the advantages- 1 mark per point
3 marks for the disadvantages- 1 mark per point
` If no discussions are given, give only 50% of the marks allocated.

b) ‘XCX company has recently initiated a formal strategy evaluation mechanism as strategy
evaluation ensures that a company is achieving what it planned to accomplish by comparing
performance with desired results and taking corrective action as required’. What key financial
ratios can be used for strategy evaluation at XCX? (7 marks)
Suggested answer:
 Return on investment (ROI)
 Return on equity (ROE)
 Profit margin
 Market share
 Debt to equity
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  Earnings per share (EPS)
 Sales growth
 Asset growth

1 mark for 1 point/ maximum 7

c) ‘McKinsey’s 7S model has been widely used to strategy implementation’. Give the ‘hard’
elements and ‘soft’ elements of McKinsey’s 7S model and briefly explain the difference between
them. (8 Marks)

Suggested answer:

‘Hard’ elements are Strategy, Structure and Systems

‘Soft’ elements are Shared Values, Skills, Style and Staff

"Hard" elements are easier to identify and management can directly influence them while "Soft"
elements can be more difficult to describe, and are less tangible and more influenced by culture

Marks should be allocated as,

3 marks for the ‘hard’ elements
3 marks for the ‘soft’ elements
2 marks for the difference

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Question number 06 (20 marks)

a) ‘Outsourcing has been widely considered in strategic management applications’. Point out some
of the errors in Outsourcing efforts that most of the organizations encounter. (6 marks)

Suggested answer:
• Outsourcing the wrong activities
• Selecting the wrong vendor
• Poor contracts
• Personnel issues
• Lack of control
• Hidden costs
• Lack of an exit strategy
1 mark for each point/ maximum 6 marks for five points

b) ‘Change is imperative in present organizations and resistance is an inevitable response to any

major change as well’. Briefly explain the organizational reasons for resistance to change and
what remedies are possible for such resistance. (6 marks)

Suggested answer:
Organizational reasons are,
 Structural issues
 Work group issues
 Threats to existing balance of power
 Cost involved in change
 Previously unsuccessful efforts

Remedies:
 Education & communication
 Participation & involvement
 Facilitation & support
 Negotiation & agreement
 Manipulation & co-optation
 Implicit and explicit coercion

Marks should be allocated as,

3 marks for reasons:1 mark for a reason (3 marks for 3 reasons). The answer should explain
each reason, if not give 50 % of the marks allocated.
3 marks for remedies: 1 mark for a remedy (3 marks for 3 remedies). The answer should explain
each reason, if not give 50 % of the marks allocated

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c) ‘Key success factors are the factors that a business must be able to do exceptionally to achieve
competitive edge in a particular market’. Explain possible key success factors for one of the
major supermarkets (i.e. Keells, Cargills etc…) in Sri Lanka. (8 marks)

Suggested answer:
 Site location with parking facilities for vehicles of customers and delivery vans
 Average store size
 IT systems linking point of sale to logistics
 Accurate and rapid feedback from consumer research
 Customer Profiling based on the purchasing power of the customers
 HR competency of the company
 Financial strength
 Other value additions given to customers- hours of business, e-shopping etc...

1 point carries 2 marks/ maximum 8 needs 4 points.

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