Chartered Institute of Internal Auditors - Past paper pack
IIA Advanced Diploma Past Paper Pack
Strategic Management
M1
Monday 26 November 2012
Afternoon session
Time allowed – 3 hours and 10 minutes
DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE INVIGILATORCandidate information and instructions
There is one question in Part A and four questions in Part B.Answer the question in Part A and any three questions in Part B on the answer sheets provided.
There are 100 marks available in this paper.
Organisations marked with an asterisk, *, are fictitious. No similarity with any real organisation is intended nor should it be inferred.
Start each question on a separate answer sheet.
Do not identify yourself in answering any questions.
Enter your candidate number, the paper number, the question number and the page number within the answer at the top of each answer sheet used.
Any plans/notes that are made for each question should only be made on official IIA exam paper. Separate answer sheets should be used for each question plan.
Clarity and logic of your answers, effective presentation and good use of English will be taken into account by the examiners when marking this paper.
Past Paper Pack
Chartered Institute of Internal Auditors
13 Abbeville Mews, 88 Clapham Park Road, London SW4 7BX
Ó March 2013
Chartered Institute of Internal Auditors - Past paper pack
PART A
There is one compulsory question in this section.
QUESTION ONE
The Apple Tree Brewery* (ATB) is a long established and reputable cider maker that employs 600 people at its head office, main brewery and manufacturing facility near Hereford in the West Midlands. ATB also has a second, smaller brewery near Taunton in Somerset that employs 150 staff. ATB owns a number of popular, well known brands of cider and also brews Peary*, a cider made from apple wine and pears.
ATB has always promoted itself as a high quality manufacturer and as a family firm with old fashioned values producing a traditional product. The owners also invested in farms producing apples and pears in Herefordshire, Worcestershire and Somerset, and these are still owned by ATB. The organisation also has long term contracts with other privately owned farms for the supply of their apple and pear harvest to ATB. In a competitive industry dominated by large multinational drinks manufacturers, ATB remains in the mid-range of UK producers.
ATB primarily sells its output to the UK market and has gradually been increasing its exports to Ireland, but it conducts very little business with other countries. ATB’s customer base is broad, with products available in pubs, restaurants, high end supermarkets and more specialist retailers. The most recent significant new customer of ATB is Trusted*, a national charity that works to maintain historical sites in the UK and Ireland. Trusted has agreed to sell ATB’s products in its restaurants and gift shops. This success has delighted ATB’s board and they hope that this initiative will lead to further brand awareness and positive publicity.
However, business is not as successful as it once was and overall forecasts for sales volumes and profitability over the next five years are worrying the board. A number of contributory factors have been identified, including:
· demand for traditional cider is falling
· competitors are promoting cider as a trendy drink for the 18 to 30 age bracket
· Peary is little known in the UK and Ireland, although competitors promote similar ’pear flavoured’ ciders.
· ATB expects to have an over-supply of fresh apples and pears from its farms and contracts over the next few years due to climate change and improved farm management
· campaigns against alcohol and new tax initiatives including minimum pricing of units of alcohol are affecting the whole of the UK drinks’ market
· ATB has always sold its products through shops and has no online presence
· ATB has recently begun to experiment with a variety of non-alcoholic drinks based upon apples and pears. Some board members believe that these represent the best hope for the future for the company and that its alcoholic products should be allowed to gradually decline.
The board has decided that strategic change is required and has embarked upon analysis of ATB’s existing strategy, its core competencies and potential areas for market share growth and improved profitability.
A small project team established to coordinate this activity has struggled to make
progress. As a senior member of ATB’s small internal audit function you have been seconded to the project in a consultancy role and are tasked with bringing drive and focus to the project team’s work.
The project team has undertaken some scenario planning, performed a PESTLE analysis and reviewed ATB’s competitive environment using Porter’s Five Forces. This activity has not led to a successful conclusion in respect of the organisation’s strategy.
You believe that ATB should now consider an internal analysis of its resources and capabilities to underpin a more effective strategy and need to persuade the project team and the board of this approach. Prepare a briefing paper in which you:
a. / Explain the scope of the proposed internal analysis and discuss why this approach may better support strategy development for ATB than the previous analytical exercises. / 15 marksb. / Describefourdifferent analytical tools ormodelsthat the project team could employ tohelp devise and implement an internal analysis-based strategy to achieve sustainable competitive advantage at ATB. / 15 marks
The board agrees that ATB has not employed IT effectively to secure competitive advantage. The IT team has always been seen as a service department running the back-office administration system, with the IT manager reporting to the finance director.
Draft a proposal to the board in which you:
c. / Outline five ways in which IT could help ATB improve its strategic competitiveness. / 10 marksSYLLABUS REFERENCE
3.1 / The role of strategy within an organisation3.3 / The determinants of business strategies
3.4 / Value creation and strategic analysis
4.3 / Internal analysis
8.4 / Resource or corporate based strategies
8.8 / Information systems management
MARK SCHEME
Mark schemes are not definitive and valid relevant points not listed will receive equal credit.Coverage
/ Remember/ Understand / Apply / Analyse / Evaluate/Create /
Total marks
Part a – Internal Analysis of resources and capabilitiesup to 1 mark for an explanation of 10 areas (max) that the analysis needs to address and understand (10 marks max). Option for up to 1 mark for format/introduction / 2 / 6 / 2 / 10
1 mark for 5 relevant points discussing why the approach may be better than the previous analysis / 5 / 5
Total part a / 2 / 6 / 7 / 15
Part b –different analytical tools ormodels
Appropriate professional introduction – 1 mark / 1 / 1Identification of a tool/model 1 mark plus explanation about it and why it is undertaken, a maximum of 3 marks for a full answer. Expectation is 4 tools/models at 1+2 marks each. / 4 / 6 / 2 / 12
Conclusion bringing the answer to a professional close – 2 marks / 2 / 2
Total part b / 4 / 7 / 4 / 15
Part c – IT to improve competitiveness
1-2 marks for each relevant, professional point made, up to a maximum of 10 points / 2 / 4 / 4 / 10
Total part c / 2 / 4 / 4 / 10
Total
/ 8 / 17 / 15 / 40a. Internal Analysis
Briefing paper format and appropriate introduction.
The internal analysis of resources and capabilities takes an “inside-out” approach when looking at the competitive environment. The starting point is ATB’s internal environment. This is an alternative perspective to a review of the competitive environment that employs an analytical tool such as the Porter’s 5 Forces framework, which takes the industry structure “outside-in” as its starting point.
The scope of the internal analysis will involve research into and an understanding of:
· Resources
the inputs that enable ATB to carry out its activities, split into:
o Tangible
The physical assets that ATB possesses:
§ Physical resources
The state of these resources such as age, condition, capacity, location determines their usefulness, to add value these resources must be capable of responding flexibly to changes in the marketplace,
these resources include:
· Buildings
· Machinery
· Materials
· Production capacity
§ Financial resources
· Capital
· Cash
· Debtors/creditors
· Availability of finance from banks, financial institutions or shareholders
§ Human resources
the mix, skills and location of the workforce.
o Intangible
Intellectual and technological resources that define ATB’s ability to innovate and the speed that innovation can occur:
§ Patents and copyrights
§ Brands
§ Goodwill
§ Human resources
· Tacit knowledge
· Specialist skills
eg the master cider brewer or taster
§ Reputation and history
· Competencies
the existence of resources is important but they do not provide any benefit to ATB but how it employs and deploys these resources provides ATB with competencies
split into:
o Threshold competencies
activities and processes needed to meet customer requirements and therefore for ATB to continue to exist
eg can we harvest apples, make cider, bottle and distribute it
o Core competencies
activities that underpin competitive advantage and are difficult for competitors to imitate or obtain, derive from:
§ Architecture
· Networks
· Internal relationships
eg owned farms supply chain
· External relationships
eg apple contracts with suppliers
§ Reputation
eg quality of cider is only known from long term experience
§ Innovation
eg new product development
The internal analysis approach may better support strategy development because:
· It emphasises ATB’s own set of resources and capabilities as a determinant of strategy and competitive advantage
· It does not emphasise industry selection and positioning. This can lead to all organisations in the same industry pursuing similar strategies.
· The key question is what drives ATB’s performance, is it the industry context in which ATB finds itself or are there factors contained within ATB which more readily account for how it performs. Given that ATB is an old player with niche skills and products in a market dominated by multi-national faceless drinks companies then it is more likely to be the latter predicate.
· It reflects better today’s rapidly changing environment. The 5 forces framework assumes relatively stable markets and does not address significant and discontinuous change in the competitive environment, for example the impact of the internet on how ATB conducts its business.
· The 5 Forces approach ignores some other forces relevant to ATB. Academia has argued that there should be a 6th Force; the Government. With the probability of legislation concerning alcohol sales this aspect is critical to strategic development at ATB.
· Organisational knowledge is important. It is widely assumed that everyone already knows what the analysis will say but there will be surprises in the findings. ATB will not achieve competitive advantage through physical resources but through the way that things are done and accumulated experience and knowledge.
b. Analytical tools
Appropriate introduction.
The tools or models that the project team should undertake to devise and implement a resource and capability based strategy to achieve sustainable competitive advantage could include:
Value Chain Analysis
This is a technique to assess ATB’s resources and in so doing determine its strengths and weaknesses. It looks at:
o The activities to go into making a product or service
o Ascertaining how much value each activity adds
o Calculation of the margin of the product
o How we can enhance the added value of each activity
The activities will need to be split into 2 categories:
· Primary Activities
the collection of activities that aid in the creation and delivery of a product:
o Inbound logistics
o Operations
o Outbound logistics
o Marketing and sales
o Service
· Support Activities
the activities to ensure that primary activities are carried out efficiently and effectively:
o Procurement
o Technology Development
o Human resource management
o Firm Infrastructure
For example, the analysis needs to identify in detail the components of the value chain in selling a bottle of cider to a customer. What are the costs of growing and harvesting the apples? What are the components of the value chain, production, marketing, bottling, packaging, warehousing and distribution?
The Value Network
While value chain activities represent the cornerstone of competitive advantage they are not a set of independent activities but they are linked to each other. An understanding of linkage will help ATB by focussing on the relationship between internal activities and their dependence on external activities.
Linkages between primary and support activities are typically obvious but linkages between one primary activity and another may not be so clear.
For example, an external apple pressing plant making juice for delivery to ATB may become aware of substantial downtime in ATB’s bottling plant because of poor servicing and maintenance while the customer is unaware of this issue.
This analysis will lead to optimisation and/or co-ordination decisions and could lead on to outsourcing, make or buy and partnering.
Activity Maps
Managers may find it difficult to identify clearly the strategic capabilities of ATB. One way of looking at the problem is by means of an activity map showing how different activities are linked.
This can be achieved using computer software or manually by drawing network diagrams.
The general lessons to be drawn from these maps include:
· Consistency
· Reinforcement
· Difficulty of imitation
· Trade offs
Benchmarking
A technique to attempt to understand how ATB’s internal processes compare with those of other organisations.
There are different approaches including:
· Historical benchmarking
comparison with ATB in previous years
· Industry/Sector benchmarking
comparison with other companies in the same sector
· Best-in-class benchmarking
compares performance with organisations known to be best ignoring the industry sector