CA INTER JAN-25

FULL COURSE MOCK TEST SERIES-2

SUBJECT- FM & SM
TOTAL MARKS-100 TIME ALLOWED:3 HR
PAPER 6A: FINANCIAL MANAGEMENT
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions, which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not required.

PART I – Case Scenario based MCQs (15 Marks)

Write the most appropriate answer to each of the following multiple choice
Questions by choosing one of the four options given. All questions are
Compulsory.

Q1. Lalit Ltd is an all-equity company engaged in manufacturing of batteries for electric
vehicles. There has been a surge in demand for their products due to rising oil prices.
The company was established 5 years ago with an initial capital of ₹ 10,00,000 and
since then it has raised funds by IPO taking the total paid up capital to ₹1 crore
comprising of fully paid-up equity shares of face value ₹ 10 each. The company
currently has undistributed reserves of ₹ 60, 00,000. The company has been
following constant dividend payout policy of 40% of earnings. The retained
earnings by company are going to provide a return on equity of 20%. The current
EPS is estimated as Rs 20 and prevailing PE ratio on the share of company is 15x.
The company wants to expand its capital base by raising additional funds by way of
debt, preference and equity mix. The company requires an additional fund of ₹1, 20,
00,000. The target ratio of owned to borrowed funds is 4:1 post the fund-raising
activity. Capital gearing is to be kept at 0.4x.
The existing debt markets are under pressure due to ongoing RBI action on NPAs of
the commercial bank. Due to challenges in raising the debt funds, the company will
have to offer ₹ 100 face value debentures at an attractive yield of 9.5% and a coupon
rate of 8% to the investors. Issue expenses will amount to 4% of the proceeds.
The preference shares will have a face value of ₹ 1000 each offering a dividend rate
of 10%. The preference shares will be issued at a premium of 5% and redeemed at
a premium of 10% after 10 years at the same time at which debentures will be
redeemed.
The CFO of the company is evaluating a new battery technology to invest the above
raised money. The technology is expected to have a life of 7 years. It will generate a
 after tax marginal operating cash flow of ₹ 25,00,000 p.a. Assume marginal tax rate
to be 27%.
1. Which of the following is best estimate of cost of equity for Lalit Ltd?
(a) 12.99%
(b) 11.99%
(c) 13.99%
(d) 14.99%
2. Which of the following is the most accurate measure of issue price of debentures?
(a) 100
(b) 96
(c) 90.58
(d) 95.88
3. Which of the following is the best estimate of cost of debentures to be issued by
the company? (Using approximation method)
(a) 7.64%
(b) 6.74%
(c) 4.64%
(d) 5.78%
4. Calculate the cost of preference shares using approximation method
(a) 10.23%
(b) 9.77%
(c) 12.12%
(d) 12.22%
5. Which of the following best represents the overall cost of marginal capital to be
raised?
(a) 10.52%
(b) 17.16%
(c) 16.17%
(d) 16.71%
(5 x 2 = 10 Marks)

2. Resham & Co. has issued 10% debenture of face value 100 for ₹ 10 lakh. The
debenture is expected to be sold at 5% discount. It will also involve floatation costs
of ₹ 10 per debenture. The debentures are redeemable at a premium of 10% after
10 years. Calculate the cost of debenture if the tax rate is 30%.
(a) 9.74%
(b) 9.56%
(c) 8.25%
(d) 10.12% (2 Marks)
3. Given Data: Sales is ₹ 10,00,000, Break even sales is ₹ 6,00,000. What is the Degree
of operating leverage?
(a) 3
(b) 2
(c) 2.5
(d) 2.2 (2 Marks)

4. A project requires an initial investment of ₹ 20,000 and it would give annual cash
inflow of ₹ 4,000. The useful life of the project is estimated to be 10 years. What is
payback reciprocal/Approximated IRR?
(a) 20%
(b) 15%
(c) 25%
(d) 12% (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
Q1. (a) PQ Ltd. has commenced new business segment in 2023-24. The following
information has been ascertained for annual production of 25,000 units which is
the full capacity.
Cost per unit (₹)
Material 100
Labour and variable overhead expenses 50
Fixed manufacturing expenses 35
Depreciation 15 15
Selling expenses (80% variable) 10
In the first two years of operations, production and sales are expected to be as
follows:
Year Production (No. of units) Sales (No. of units)
1 12,000 10,000
2 18,000 19,000
The selling price is expected to be ₹ 250.
To assess the working capital requirements, the following additional information
is available:
(a) Stock of materials 2 months’ average consumption
(b) Debtors 1.5 month’s average sales.
(c) Cash balance ₹ 50,000
(d) Creditors for supply of materials 1 month’s average purchase
During the year.
(e) Expenses All expenses will be paid 1 month
in advance during the year.
 Goods equal to 15% of the year’s production (in terms of physical units) will be in
process on the average requiring full materials but only 40% of the other expenses.
The management is also of the opinion to make 10% margin for contingencies on
computed figure and value the closing stock at cost of production.
PREPARE, for the two years:
(i) A projected statement of Profit/Loss (Ignoring taxation); and
(ii) A projected statement of working capital requirements on a cash cost basis.
(7 Marks)
ANSWER:
(b) RST Ltd. has a capital of Rs. 10,00,000 in equity shares of Rs. 100 each. The shares
are currently quoted at par. The company proposes to declare a dividend of Rs. 10
per share at the end of the current financial year. The capitalization rate for the risk
class of which the company belongs is 12%. COMPUTE the market price of the share
at the end of the year, if
(i) a dividend is not declared?
(ii) a dividend is declared?
(iii) assuming that the company pays the dividend and has net profits of Rs.5,00,000
and makes new investments of Rs.10,00,000 during the period, how many new shares
must be issued? Use the MM model. (5 Marks)
ANSWER:

(c) A firm has sales of 1 75,00,000 variable cost is 56% and fixed cost is1 6,00,000. It
has a debt of 1, 45,00,000 at 9% and equity of 1 55,00,000. You are required to
INTERPRET:
(i) The firm9s ROI?
(ii) Does it have favorable financial leverage?
 (iii) If the firm belongs to an industry whose capital turnover is 3, does it have a
high or low capital turnover?
(iv) The operating, financial and combined leverages of the firm?
(v) If the sales is increased by 10% by what percentage EBIT will increase?
(vi) At what level of sales the EBT of the firm will be equal to zero?
(vii) If EBIT increases by 20%, by what percentage EBT will increase?
(5 Marks)
ANSWER :
Q2. (a) Hindlever Company is considering a new product line to supplement its range of
products. It is anticipated that the new product line will involve cash investments of
Rs 7,00,000 at time 0 and Rs 10,00,000 in year 1. After-tax cash inflows of Rs
2,50,000 are expected in year 2,Rs 3,00,000 in year 3, Rs 3,50,000 in year 4 and Rs
4,00,000 each year thereafter through year 10. Although the product line might be
viable even after year 10, the company prefers to be conservative and end all
calculations at that time.
(a) If the required rate of return is 15 per cent, COMPUTE net present value of the
project. Is it acceptable?
(b) ANALYSE what would be the case if the required rate of return were 10 per cent?
(c) CALCULATE its internal rate of return.
(d) COMPUTE the projects payback period.
(4 Marks)
ANSWER :
(b) The Modern Chemicals Ltd. requires Rs.25,00,000 for a new plant. This plant is
expected to yield earnings before interest and taxes of Rs. 5,00,000. While deciding
about the financial plan, the company considers the objective of maximizing
earnings per share. It has three alternatives to finance the project- by raising debt of
Rs.2,50,000 or Rs.10,00,000 or Rs.15,00,000 and the balance, in each case, by issuing
equity shares.
The company’s share is currently selling at Rs. 150, but is expected to decline to
Rs.125 in case the funds are borrowed in excess of Rs.10,00,000. The funds can be
borrowed at the rate of 10% up to Rs. 2,50,000, at 15% over Rs.2,50,000 and up to
Rs.10,00,000 and at 20% over Rs.10,00,000. The tax rate applicable to the company
is 50%.
DETERMINE, which form of financing should the company choose?
(6 Marks)
ANSWER :
Calculation of Earnings per share for three alternatives to finance the project

The company should raise Rs.10,00,000 from debt and Rs.15,00,000 by issuing equity
shares, as it gives highest EPS.
Q3. (a) MNP limited has made plans for the year 2019-20. It is estimated that the
company will employ total assets of Rs.50, 00,000; 30% of assets being financed by
debt at an interest cost of 9% p.a. The direct costs for the year are estimated at Rs.
30, 00,000 and all other operating expenses are estimated at Rs. 4, 80,000. The
 sales revenue is estimated at Rs. 45, 00,000. Tax rate is assumed to be 40%.
Calculate:
(i) Net profit margin (After tax);
(ii) Return on Assets (After tax);
(iii) Asset turnover; and
(iv) Return on Equity.
(8 Marks)
ANSWER:

(b) EXPLAIN as to how the wealth maximization objective is superior to the profit
maximization objective (2 Marks)
ANSWER: A firm’s financial management may often have the following as their
objectives:
(a) The maximisation of firm’s profit.
(b) The maximisation of firm’s value / wealth.
 The maximisation of profit is often considered as an implied objective of a firm. To
achieve the aforesaid objective various type of financing decisions may be taken.
Options resulting into maximisation of profit may be selected by the firm’s decision
makers. They even sometime may adopt policies yielding exorbitant profits in short
run which may prove to be unhealthy for the growth, survival and overall interests of
the firm. The profit of the firm in this case is measured in terms of its total accounting
profit available to its shareholders.
The value/wealth of a firm is defined as the market price of the firm’s stock. The
market price of a firm’s stock represents the focal judgment of all market
participants as to what the value of the particular firm is. It takes into account
present and prospective future earnings per share, the timing and risk of these
earnings, the dividend policy of the firm and many other factors that bear upon the
market price of the stock.
The value maximization objective of a firm is superior to its profit maximization
objective due to following reasons.
1. The value maximization objective of a firm considers all future cash flows,
dividends, earning per share, risk of a decision etc. whereas profit
maximization objective does not consider the effect of EPS, dividend paid or
any other returns to shareholders or the wealth of the shareholder.
2. A firm that wishes to maximize the shareholders wealth may pay regular
dividends whereas a firm with the objective of profit maximization may
refrain from dividend payment to its shareholders.
3. Shareholders would prefer an increase in the firm’s wealth against its
generation of increasing flow of profits.
4. The market price of a share reflects the shareholders expected return,
considering the long-term prospects of the firm, reflects the differences in
timings of the returns, considers risk and recognizes the importance of
distribution of returns.
The maximization of a firm’s value as reflected in the market price of a share is
viewed as a proper goal of a firm. The profit maximization can be considered as a
part of the wealth maximization strategy.

Q4. (a) G Limited has the following capital structure, which it considers to be
optimal:
G Limited9s expected net income this year is Rs 34,285.72, its established dividend
payout ratio is 30 per cent, its tax rate is 40 per cent, and investors expect earnings and
dividends to grow at a constant rate of 9 per cent in the future. It paid a dividend of Rs
3.60 per share last year, and its shares currently sells at a price of Rs 54 per share.
G Limited requires additional funds which it can obtain in the following ways:
Preference Shares: New preference shares with a dividend of Rs.11 can be sold to the
public at a price of Rs.95 per share.
Debt: Debt can be sold at an interest rate of 12 per cent. You are required to:
DETERMINE the cost of each capital structure component; and COMPUTE the weighted
average cost of capital (WACC) of G Limited.
(4 Marks)
ANSWER:
(i) Computation of Costs of Different Components of Capital:

(b) EXPLAIN the importance of trade credit and accruals as source of working capital.
What is the cost of these sources? (4 Marks)
ANSWER: Trade credit and accruals as source of working capital refers to credit facility
given by suppliers of goods during the normal course of trade. It is a short-term source
of finance. SSI firms in particular are heavily dependent on this source for financing
their working capital needs. The major advantages of trade credit are – easy
availability, flexibility and informality.
There can be an argument that trade credit is a cost-free source of finance. But it is not.
It involves implicit cost. The supplier extending trade credit incurs cost in the form of
opportunity cost of funds invested in trade receivables. Generally, the supplier passes
on these costs to the buyer by increasing the price of the goods or alternatively by not
extending cash discount facility.

(c) EXPLAIN the concept of discounted payback period. (2 Marks)

ANSWER: Concept of Discounted Payback Period
Payback period is time taken to recover the original investment from project cash flows.
It is also termed as break even period. The focus of the analysis is on liquidity aspect and
it suffers from the limitation of ignoring time value of money and profitability.
Discounted payback period considers present value of cash flows, discounted at
company’s cost of capital to estimate breakeven period i.e. it is that period in which
future discounted cash flows equal the initial outflow. The shorter the period, better it is.
It also ignores post discounted payback period cash flows.
OR
EXPLAIN the concept of Indian depository receipts. (2 Marks)
ANSWER: Concept of Indian Depository Receipts: The concept of the depository
receipt mechanism which is used to raise funds in foreign currency has been applied in
the Indian capital market through the issue of Indian Depository Receipts (IDRs). Foreign
companies can issue IDRs to raise funds from Indian market on the same lines as an
Indian company uses ADRs/GDRs to raise foreign capital. The IDRs are listed and traded
in India in the same way as other Indian securities are traded.
 PAPER 6B: STRATEGIC MANAGEMENT
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises case scenario based multiple-choice questions (MCQs)
3. Part II comprises questions, which require descriptive type answers.
PART I – Case scenario based MCQs (15 Marks)

Question 1.(A)(Compulsory)
1. (A) Café Delight, a thriving restaurant chain known for its unique blend of Australian
and Indian culinary experiences, embarked on a remarkable journey from its
humble beginnings as a small café in Australia to becoming a renowned player in
the Indian restaurant industry. This case study digs into the strategic decisions and
market dynamics that fueled Café Delight's growth, highlighting its transition from
a single café in Powai, Mumbai, to a flourishing chain with a presence in five cities
and over 25 stores. It explores how Café Delight effectively leveraged social media
and adapted its pricing strategy to compete with global brands while maintaining a
healthy profit margin.
In 2005, Café Delight was founded in Melbourne, Australia, by a passionate
entrepreneur with a vision to bring the flavors of Australia and India together. The
first café established in Powai, Mumbai, received accolades for its unique menu,
blending Australian coffee culture with Indian culinary traditions. Over the course
of five years, Café Delight expanded to three stores in Mumbai, driven by exceptional
mouth publicity, customer loyalty, and consistent quality.
As the social media landscape evolved, Café Delight recognized the power of online
platforms in reaching a wider audience. By effectively utilizing social media and
online marketing, Café Delight expanded its presence to five cities across India and
established over 25 stores. Customer engagement through social media platforms
enabled the brand to create a strong and vibrant community, driving organic
growth.
Café Delight's customer-centric approach involved continuously evolving its menu
to cater to the changing tastes and dietary preferences of its patrons. By
understanding the evolving needs of its customers, Café Delight could offer
personalized menu items, seasonal specials, and dietary alternatives. This approach
created a sense of loyalty and engagement among customers, strengthening the
brand's appeal. Not just customers but High-power, low-interest stakeholders,
including regulatory authorities, were addressed with careful compliance and
adherence to industry standards. Low-power, high-interest stakeholders, like
potential customers and local communities, were engaged through targeted
marketing campaigns and community involvement initiatives. This meticulous
stakeholder analysis allowed Café Delight to build and maintain strong relationships
with each group, effectively managing their influence and impact on the brand.
With its expanding presence and increasing popularity, Café Delight underwent a
shift in its pricing strategy. It transitioned from a pocket- friendly pricing model to
a skimming strategy, capitalizing on its unique blend of Australian and Indian
flavors to position itself as a premium restaurant. Café Delight faced stiff
competition from global brands entering the Indian market but maintained a profit
margin of approximately 30% through menu engineering and targeted pricing.
In one of its kind, using strategic tools enabled Café Delight to identify and act on
opportunities while mitigating threats, contributing to its long- term success in the
highly competitive restaurant industry.

Based on the above Case Scenario, answer the Multiple-Choice

Questions.
(i) Café Delight effectively leveraged social media and adapted its pricing strategy
as it stepped into which phase of business life cycle of operations?
(a) Introduction Stage
(b) Growth Stage
(c) Maturity Stage
(d) Decline Stage (2 Marks)

(ii) What stakeholder group did Café Delight engage through targeted marketing
campaigns and community involvement initiatives?
(a) High-power, high-interest stakeholders
(b) Low-power, low-interest stakeholders
(c) Low-power, high-interest stakeholders
(d) High-power, low-interest stakeholders (2 Marks)

(iii) What best describes Café Delight's initial expansion strategy when it expanded
from one café to three in Mumbai?
(a) Aggressive price reduction
(b) Leveraging customer loyalty and word-of-mouth publicity
(c) Extensive online marketing
(d) Embracing global branding strategies (2 Marks)

(iv) At which level of strategic management does Café Delight's transition from a
pocket-friendly pricing model to a skimming strategy fit?
(a) Corporate level
(b) Business level
(c) Functional level
(d) Operational level (2 Marks)
 (v) What type of strategy did Café Delight use to differentiate itself from
competitors in the Indian restaurant industry?
(a) Cost leadership strategy
(b) Focused differentiation strategy
(c) Cost focus strategy
(d) Hybrid strategy (2 Marks)

(B) Compulsory Application Based Independent MCQs

(i) Shamita joined GlobalX Consulting firm as an Analyst in financial fraud mitigation.
In her very first assignment, she faced an integrity dilemma where her subordinates
had missed calling out a potential financial risk which could impact the overall fraud
rating of the organization. She quickly reached out to her seniors who appreciated
her diligence and immediately reported the same to senior management. In this
scenario which element, soft or hard, is acting in favor of GlobalX?
(a) Strategy
(b) Systems
(c) Shared Value
(d) Staff (2 Marks)

(ii) Chocopo, an ice cream company run by Shri Shyam Kumar since 1985, now had its
management change to his two daughters, who came in and wanted to experiment
with a lot of flavors. They introduced 21 new flavors in a span of 6 months while not
losing out of 2 legendary flavors of their dad i.e. Stick Kulfi and Mango Bar. After
year 1 of operations, 9 out of the 21 flavors had to be stopped, while 10 flavors were
still kept, extending the experimentation. The early sense from market was that they
would have to be stopped too, but the sisters decided to extend their timelines. What
category as per BCG Matrix would the 10 flavors fall into?
(a) Cash Cow
(b) Dog
(c) Question Mark
(d) Star (2 Marks)

(iii) A company negotiating the best prices and quality from its suppliers to add to
customer’s delight is an example of?
(a) Value Creation by improving primary activity
(b) Value Creation by improving support activity
(c) Competitive Advantage Creation
(d) Stakeholder Management (1 Mark)
 PART II – Descriptive Questions (35 Marks)
Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.

Q1. (a) EMC Pharmaceuticals, a leading pharmaceutical company, is in the process of

formulating its strategic intent. The top management of EMC Pharmaceuticals
wants to define the company's future direction, objectives, and goals. Their aim is
to create a vision that sets the organization apart and provides a roadmap for
future growth. EMC Pharmaceuticals aspires to enrich the lives of people by
producing high- quality pharmaceutical products at competitive prices and wants
to become the world's leading pharmaceutical company by 2030." Based on this
context, draft a vision and mission statement that could be formulated by the top
management of EMC Pharmaceuticals.
(5 Mark)
ANSWER: EMC Pharmaceuticals may have following vision and mission:
Vision: Vision implies the blueprint of the company’s future position. It describes
where the organization wants to land. EMC Pharmaceuticals may have vision "To be
the globally recognized leader in pharmaceutical innovation and enriching the lives
of people worldwide by providing high-quality, affordable, and accessible
pharmaceutical products."
Mission: Mission delineates the firm’s business, its goals and ways to reach the goals.
It explains the reason for the existence of the firm in society. It is designed to help
potential shareholders and investors understand the purpose of the company.
EMC Pharmaceuticals may identify mission in the following lines:
• To improve the well-being of individuals and communities by relentlessly
pursuing excellence in pharmaceutical research, development, and
manufacturing.
• Committed to producing safe, effective, and sustainable medicines that address
unmet medical needs and enhance the quality of life for patients.
• Through innovation, collaboration, and ethical practices, we aim to make a
positive impact on global healthcare and become the trusted partner of
healthcare providers and patients alike.

(b) Define Strategic Management. Also, discuss the limitations of Strategic Management.
(5 Mark)
ANSWER: The term ‘strategic management’ refers to the managerial process of
developing a strategic vision, setting objectives, crafting a strategy, implementing
and evaluating the strategy, and initiating corrective adjustments were deemed
appropriate.
 The presence of strategic management cannot counter all hindrances and always
achieve success as there are limitations attached to strategic management. These
can be explained in the following lines:
 Environment is highly complex and turbulent. It is difficult to understand
the complex environment and exactly pinpoint how it will shape-up in future.
The organizational estimate about its future shape may awfully go wrong and
jeopardize all strategic plans. The environment affects as the organizational to
deal with suppliers, customers, governments and other external factors.
 Strategic Management is a time-consuming process. Organizations spend a
lot of time in preparing, communicating the strategies that may impede daily
operations and negatively impact the routine business.
 Strategic Management is a costly process. Strategic management adds a lot
of expenses to an organization. Expert strategic planners need to be engaged,
efforts are made for analysis of external and internal environments, devise
strategies and properly implement. These can be really costly for organizations
with limited resources particularly when small and medium organization
create strategies to compete.
 Competition is unpredictable. In a competitive scenario, where all
organizations are trying to move strategically, it is difficult to clearly estimate
the competitive responses to the strategies.

(c) A company has recently launched a new product in the market. Initially, it faced slow
sales growth, limited markets, and high prices. However, over time, the demand for
the product expanded rapidly, prices fell, and competition increased. Identify the
stages of the product life cycle (PLC) that the company went through.
(5 Mark)
ANSWER: The company went through the following stages of the product life cycle
(PLC):
Introduction stage: Initially, the company faced slow sales growth, limited markets,
and high prices, which are characteristic of the introduction stage. During this stage,
competition is almost negligible, and customers have limited knowledge about the
product.
Growth stage: Over time, the demand for the product expanded rapidly, prices fell,
and competition increased. These are typical features of the growth stage in the PLC.
In this stage, the product gains market acceptance, and customers become more
aware of the product's benefits and show interest in purchasing it.
 Q2. (a) Raman owns an electrical appliance company specializing in the manufacture
of domestic vacuum cleaners. The market is competitive, with four other
manufacturers offering similar products and achieving comparable sales volumes.
Additionally, these rival firms hold several patents related to the vacuum cleaner
technology. The supplier base for raw materials is extensive, with multiple
suppliers available. Identify and explain the significant forces from Porter’s Five
Forces framework that are relevant to Raman’s company.
(5 Mark)
ANSWER: The competitive rivalry will be a significant force in case of company of
Raman as all the rivals are similar in sizes and are manufacturing similar products.
It is difficult for any single manufacturer to dominate the market. Large number of
patents will make it difficult for new entrants to break into the market. Further, as
there are a large number of small suppliers the power that suppliers can exert will
also be low.
There is no information relating to substitutes and bargaining power of customers
in the information given in scenario. However, a domestic vacuum cleaner will
directly compete with other options such as house maids. Availability of house
maids at low cost can significantly disturb the sales of products.
Further, as the products are similar customers can easily shift from one company to
another. This will only enhance competitive rivalry.

(b) What are channels? Why is channel analysis important? Explain the different types
of channels? (1 + 1 + 3 = 5 Marks)

ANSWER: Channels represent the distribution system through which organizations

distribute their products or provide services to customers. They play a pivotal role
in reaching target markets, maximizing sales, and establishing competitive
advantages.
Channel analysis is important when the business strategy is to scale up and expand
beyond the current geographies and markets. When a business plans to grow to
newer markets, they need to develop or leverage existing channels to get to new
customers. Thus, analysis of channels that suit one’s products and customers is of
utmost importance. There are typically three channels that should be considered:
sales channel, product channel and service channel.
 The sales channel - These are the intermediaries involved in selling the product
through each channel and ultimately to the end user. The key question is: Who
 needs to sell to whom for your product to be sold to your end user? For
example, many fashion designers use agencies to sell their products to retail
organizations, so that consumers can access them.
 The product channel - The product channel focuses on the series of
intermediaries who physically handle the product on its path from its producer
to the end user. This is true of Australia Post, who delivers and distributes many
online purchases between the seller and purchaser when using eBay and other
online stores.
 The service channel - The service channel refers to the entities that provide
necessary services to support the product, as it moves through the sales
channel and after purchase by the end user. The service channel is an important
consideration for products that are complex in terms of installation or
customer assistance. For example, a Bosch dishwasher may be sold in a Bosch
showroom, and then once sold it is installed by a Bosch contracted plumber.

Q3. (a) Explain the concept of vertically integrated diversification. How is forward
integration different from backward integration?
(5 Mark)
ANSWER: Vertically integrated diversification is a strategic approach in which a
company expands its business operations into different stages of the production or
distribution process within the same industry. This involves either forward
integration or backward integration.
The key difference between forward and backward integration lies in the direction
of expansion within the supply chain. Forward integration moves towards the end
consumer, while backward integration moves towards the source of raw materials
or components.
Forward integration allows companies to have more control over distribution
channels, improve customer relationships, and capture a larger share of the value
chain. In contrast, backward integration helps companies secure a stable supply of
inputs, reduce dependency on suppliers, and potentially lower production costs.
Forward integration is often associated with activities such as retailing, marketing,
and after-sales services, while backward integration is associated with activities
such as manufacturing, sourcing, and procurement.
Both types of integration offer strategic advantages such as increased market
power, cost efficiencies, and greater control over critical business processes.
However, the decision to pursue forward or backward integration depends on
factors such as industry dynamics, competitive landscape, and the company's core
competencies and resources.
(b) Define Strategic Performance Measures (SPM). Explain various types of strategic
performance measures. (5 Marks)
ANSWER: Strategic Performance Measures (SPM) are metrics used by organizations to
evaluate and track the effectiveness of their strategies in achieving strategic goals
and objectives. SPM provides a framework for measuring the performance of key
areas critical to the success of the organization's strategy. These measures help in
assessing whether the organization is progressing towards its desired outcomes
and allow for adjustments to be made to improve performance.
Types of Strategic Performance Measures
There are various types of strategic performance measures, including:
 Financial Measures: Financial measures, such as revenue growth, return on
investment (ROI), and profit margins, provide an understanding of the
organization's financial performance and its ability to generate profit.
 Customer Satisfaction Measures: Customer measures, such as customer
satisfaction, customer retention, and customer loyalty, provide insight into the
organization's ability to meet customer needs and provide high-quality
products and services.
 Market Measures: Market measures, such as market share, customer
acquisition, and customer referrals, provide information about the
organization's competitiveness in the marketplace and its ability to attract and
retain customers.
 Employee Measures: Employee measures, such as employee satisfaction,
turnover rate, and employee engagement, provide insight into the
organization's ability to attract and retain talented employees and create a
positive work environment.
 Innovation Measures: Innovation measures, such as research and development
(R&D) spending, patent applications, and new product launches, provide
insight into the organization's ability to innovate and create new products and
services that meet customer needs.
 Environmental Measures: Environmental measures, such as energy
consumption, waste reduction, and carbon emissions, provide insight into the
organization's impact on the environment and its efforts to operate in a
sustainable manner.

Q4. (a) ITech Solutions, an aerospace technology firm, operates in a highly competitive
industry. Despite the fierce competition in the aerospace sector, StarTech has
carved out a niche for itself by focusing on serving unique, high-end clients. Unlike
its competitors, ITech has chosen not to diversify its target market and instead
specializes in providing cutting-edge solutions to this niche market.
 Identify and explain the strategy adopted by ITech Solutions. Discuss the
advantages and disadvantages of this strategy.
(5 Mark)
ANSWER: The strategy adopted by ITech Solutions is Focused differentiation. This
strategy involves targeting a specific segment of the market with unique products
or services that are perceived as valuable by customers in that segment. By
specializing in serving unique, high-end clients, ITech is able to differentiate itself
from competitors and create a competitive advantage.
Advantages of Focused Differentiation:
• Strong Customer Loyalty: By catering to a specific niche market, ITech can build
strong relationships with its customers, leading to higher customer loyalty and
retention.
• Higher Profit Margins: Serving a niche market allows ITech to command higher
prices for its specialized products or services, leading to higher profit margins.
• Reduced Competition: By focusing on a niche market that other firms are not
targeting, ITech faces less competition, allowing it to establish itself as a leader in
that segment.
• Better Resource Allocation: Focusing on a specific market segment allows ITech to
allocate its resources more efficiently, concentrating on areas that will provide the
greatest return on investment.
Disadvantages of Focused Differentiation:
• Limited Market Size: The niche market that ITech is targeting may be limited in
size, restricting the company's potential for growth.
• Risk of Market Changes: Changes in the market or customer preferences could
impact on the demand for ITech 's specialized products or services, leading to
potential revenue loss.
• Higher Costs: Serving a niche market may require specialized resources and
expertise, leading to higher costs of operation.
• Imitation by Competitors: If ITech's success in the niche market attracts
competitors, they may attempt to imitate its strategy, eroding its competitive
advantage.
Overall, the focused differentiation strategy adopted by ITech Solutions has allowed
it to differentiate itself in a competitive industry and build a strong position in the
market. However, the company must be aware of the potential challenges and risks
associated with this strategy and continue to innovate and adapt to maintain its
competitive edge.
 (b) Describe the principal aspects of strategy-execution process, which are
included in most situations. (5 Marks)
ANSWER: Implementation or execution is an operations-oriented, activity aimed at
shaping the performance of core business activities in a strategy- supportive
manner. In most situations, strategy-execution process includes the following
principal aspects:
 Developing budgets that steer ample resources into those activities that are
critical to strategic success.
 Staffing the organization with the needed skills and expertise, consciously
building and strengthening strategy-supportive competencies and competitive
capabilities and organizing the work effort.
 Ensuring that policies and operating procedures facilitate rather than impede
effective execution.
 Using the best-known practices to perform core business activities and pushing
for continuous improvement.
 Installing information and operating systems that enable company personnel
to better carry out their strategic roles day in and day out.
 Motivating people to pursue the target objectives energetically.
 Creating culture and climate conducive to successful strategy implementation
and execution.
 Exerting the internal leadership needed to drive implementation forward and
keep improving strategy execution.
OR
How does the PESTLE framework assist in analyzing the macro- environment?
(5 Marks)
ANSWER: The PESTLE framework assists in analyzing the macro-environment by
systematically evaluating six external factors that impact an organization’s
operations and strategy.
1. Political Factors: This includes government policies, regulations, political
stability, and taxation. Understanding these factors helps organizations
anticipate regulatory changes and government interventions that could affect
their business environment.
2. Economic Factors: This involves assessing economic conditions such as
interest rates, inflation, exchange rates, and economic growth. These factors
influence business costs, consumer purchasing power, and overall market
conditions.
3. Social Factors: This examines demographic trends, lifestyle changes, cultural
norms, and consumer attitudes. Insights into social factors help businesses
align their products and services with evolving consumer preferences and
societal trends.
4. Technological Factors: This includes technological advancements, innovation
rates, and technological infrastructure. These factors impact production
processes, product development, and competitive positioning.
5. Legal Factors: This involves understanding business laws, employment
regulations, health and safety standards, and compliance requirements. Legal
factors are crucial for ensuring regulatory compliance and avoiding legal risks.
6. Environmental Factors: This covers ecological issues, sustainability practices,
and environmental regulations. Awareness of environmental factors helps
businesses adapt to climate change and meet sustainability goals.
By analyzing these factors, the PESTLE framework provides a comprehensive
understanding of the macro-environment, helping organizations anticipate
changes, adapt strategies, and make informed decisions.