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Mock Test Paper - Series I: November, 2024

Date of Paper: 23rd November, 2024
Time of Paper: 2 P.M. to 5 P.M.

INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. (c) ` 0.72
Computation of EPS under financial plan I: Equity Financing
(`)
EBIT 37,50,000.00
Interest -
EBT 37,50,000.00
Less: Taxes 40% (15,00,000.00)
PAT 22,50,000.00
No. of equity shares 31,25,000.00
EPS 0.72
2. (b) ` 0.90
Computation of EPS under financial plan II: Debt – Equity Mix
(`)
EBIT 37,50,000.00
Less: Interest (14,06,250.00)
EBT 23,43,750.00
Less: Taxes 40% (9,37,500.00)
PAT 14,06,250.00
No. of equity shares 15,62,500.00
EPS 0.90
3. (a) ` 0.44
Computation of EPS under financial plan III: Preference Shares –
Equity Mix
(`)
EBIT 37,50,000.00
Less: Interest -

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EBT 37,50,000.00
Less: Taxes (40%) (15,00,000.00)
PAT 22,50,000.00
Less: Pref. dividend (15,62,500.00)
PAT for equity shareholders 6,87,500.00
No. of Equity shares 15,62,500.00
EPS 0.44
4. (a) ` 28,12,500
EBIT – EPS Indifference Point- Plan I and Plan II:
(EBIT) × (1- TC ) (EBIT − Interest) × (1 − TC )
=
N1 N2

EBIT(1 − 0.40) (EBIT − 14,06,250) × (1 − 0.40)

=
31,25,000 15,62,500
0.6EBIT = 1.2 EBIT – 16,87,500
= ` 28,12,500
5. (d) ` 52,08,333.33
EBIT – EPS Indifference Point: Plan I and Plan III
EBIT(1 − Tc ) EBIT(1 − Tc ) − Pref. Div.
=
N1 N2

EBIT(1 − 0.4) EBIT(1 − 0.4) − 15,62,500

=
31,25,000 15,62,500
0.6EBIT = 1.2EBIT – 31,25,000
EBIT = ` 52,08,333.33
6. (b) 30%
The formula for Degree of Combined Leverage (DCL) is:
DCL=DOL×DFL
DCL=2×3=6
The percentage change in EPS is:
% Δ EPS = DCL × % Δ Sales
% Δ EPS = 6 × 5% = 30%
7. (c) 3.79
Initial Investment = Annual Cost Savings × PVAF
Annual cost savings = ` 1,80,000
PVAF (10%, 5 years) = 3.79
Initial Investment = 1,80,000 × 3.79 = 6,82,200
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Payback Period = Initial Investment/ Annual Cost Savings

= 6,82,200/1,80,000
= 3.79 years
8. (c) Remains unchanged because value depends on earnings and
investment policy.
(Explanation: M&M's theory suggests that dividend policy has no impact
on shareholder wealth in a perfect market.)

PART II – Descriptive Questions

1. (a) Statement showing Computation of Combined leverage
`
Sales 2,00,000
Less: Variable costs (50%) 1,00,000
Contribution 1,00,000
Less: Fixed operating costs 40,000
EBIT 60,000
Less: Interest 10,000
Taxable Income (PBT) 50,000
C 1,00,000
Combined leverage = = =2
PBT 50,000

The combined leverage of '2' indicates that with every increase of ` 1 in

sales, the taxable income will increase by ` 2 (i.e. 1×2). This can be
verified by the following computations when the sales increase by 10%
`
Sales 2,20,000
Less: variable costs (50%) 1,10,000
Contribution 1,10,000
Less: Fixed operating costs 40,000
EBIT 70,000
Less: Interest 10,000
Taxable Income (PBT) 60,000
It is clear from the above computation that on account of increase in
sales by 10%, the profit before tax has increased by 20%.

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(b) (i) Computation of Weighted Average Cost of Capital based on

existing capital structure
Source of Capital Existing Weights After tax WACC
Capital cost of (%)
structure (a) capital (%)
(`) (b) (a) × (b)
Equity share capital
10,00,000 0.250 10.000 2.500
(W.N.1)
12% Preference
15,00,000 0.375 12.000 4.500
share capital
10% Debentures
15,00,000 0.375 6.500 2.438
(W.N.2)
Total 40,00,000 1.000 9.438
Working Notes:
1. Cost of Equity Capital:
Expecteddividend(D1 )
Ke = + Growth(g)
CurrentMarketPrice(P0 )

`5
= + 0.05
` 100
= 10%
2. Cost of 10% Debentures
Interest(1- t)
Kd =
Netproceeds

` 1,50,000 (1- 0.35)

=
` 15,00,000
= 0.065 or 6.5%
(ii) Computation of Weighted Average Cost of Capital based on
new capital structure
Source of Capital New Weights After tax WACC
Capital cost of (%)
structure (a) capital (%)
(`) (b) (a) x (b)
Equity share capital 10,00,000 0.222 12.777 2.836
(W.N.3)
12% Preference 15,00,000 0.334 12.000 4.000
share capital
10% Debentures 15,00,000 0.333 6.500 2.165
(W.N.2)

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12% Debentures 5,00,000 0.111 7.800 0.866

(W.N.4)
Total 45,00,000 1.000 9.867
Working Notes:
3. Cost of Equity Capital:
`7
Ke = + 0.05
` 90
= 12.777%
4. Cost of 12% Debentures
` 60,000 (1- 0.35)
Kd =
` 5,00,000
= 0.078 or 7.8%
(c) Fair Value of Company = Present Value all future cash flows discounted
at the expected Rate of return of acquiring company.
WN 1 – Calculation of Cash flows ` in Lakhs
YEAR 1 2 3 4 5 6
Contribution 10 12 14.4 20.16 28.22 35.28
(40% on sales)
(-) Fixed Cost -12 -12 -10 -10 -10 -10
NPBT (A) -2 0 4.4 10.16 18.22 25.28
(-) Losses Set Off 0 0 -2(Setoff) 0 0 0
Taxable Income 0 0 2.4 10.16 18.22 25.28
(-) Tax @ 25% 0 0 0.6 2.54 4.55 6.32
(B)
Cash Flow (A – -2 0 3.8 7.62 13.66 18.96
B)
PV OF CASH -1.740 0 2.50 4.35 6.79 8.19
FLOWS @ 15%
Total PV of cash flows (yr 1 to 6) = 20.08 lakhs
18.96 + 10%
(+) PV of cash flow at terminal value (end of Year 6) =
0.15 - 0.10
= 417.12 Lakhs
Therefore, PV of above = 417.12 X PV factor (15%, 6th Year)
= 180.20 lakhs
Total fair value of Aryayash limited = 20.08 + 180.20 = 200.28 Lakhs
Note – 1. Discounting rate should be the desired rate of acquiring
company i.e. of Vyom Limited

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2. Terminal value of cash flows means the cash flows at that point
from where it would grow at constant rate. Here it assumed that
from 7th year, Cash flows/NPAT will grow at a constant rate and not
sales
2. (a) Working Note:
1. Current Liabilities and Current Assets:
Let Current Liabilities be x
Given Current ratio = 2.5
Current Assets = 2.5x
Working Capital = 2.5x- x =1.5x
or x = 1,20,000/1.5 = 80,000
So Current Liabilities = 80,000
And Current Assets = 80,000 x 2.5 = 2,00,000
2. Closing Stock
Given, Quick Ratio = 1.3
CurrentAssets - Closing Stock
=1.3
CurrentLiabilities - Bank Overdraft
2,00,000 - Closing Stock
= 1.3
80,000 -15,000
or Closing Stock = 2,00,000-84,500 =1,15,500
Opening Stock = 1,15,000 x 100/110 =1,05,000
3. Debtors
Given Debtors Velocity = 40 days
Debtors
x 365 = 40
Sales
7,30,000x40
Debtors = = 80,000
365
4. Gross Profit = 7,30,000 x 10/100 = 73,000
5. Proprietary Fund:
Proprietary Ratio = 0.6
Fixed Assets
= 0.6
Proprietary Fund
Working Capital
0.4
Proprietary Fund
1,20,000
Proprietary Fund = = 3,00,000
0.4
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Fixed Assets = 3,00,000 x 0.6 = 1,80,000

Net Profit = 10% of Proprietary Fund = 30,000
M/s Anya Co Ltd.
Trading and Profit and loss Account for the year ended
31 March 2024
Amount in Particulars Amount in
Particulars ` `
To Opening Stock 1,05,000 By Sales 7,30,000
To Purchase By Closing
(Balancing Fig.) 6,67,500 Stock 1,15,500
To Gross Profit 73,000
8,45,500 8,45,500
To Operating By Gross Profit 73,000
Expenses (Balancing
Figure) 43,000
To Net Profit 30,000
73,000 73,000

Balance Sheet as on 31 March 2024

Liabilities Amount in Assets Amount in
` `
Share Capital 2,50,000 Fixed Assets 1,80,000
Reserves & Surplus
(Opening bal. +
current profit) 50,000
Current Liabilities Current Assets
Bank Overdraft 15,000 Stock 1,15,500
Other Current
Liabilities 65,000 Debtors 80,000
Other Current
Assets 4,500
3,80,000 3,80,000
(b) As per Dividend discount model, the price of share is calculated as
follows:
D1 D2 D3 D4 D5 1
P= 1 + 2 + 3 + 4 + (K × 4
(1+Ke ) (1+Ke ) (1+Ke ) (1+Ke ) e -g) (1+Ke )

Where,
P = Price per share
Ke = Required rate of return on equity

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g = Growth rate
Calculation PV of Dividends
Year Dividend per share PVF @ 15% PV
1 4.4 0.870 3.828
2 4.84 0.756 3.660
3 5.324 0.658 3.503
4 5.856 0.572 3.350
Total 14.341
`5.856x1.05 1
PV of Terminal Value = 1
× = 61.488 x .572 = 35.171
(0.15 - 0.05) (1+ 0.15)4

Intrinsic value of share = PV of Dividends + PV of terminal value

= 14.341 + 35.171 = ` 49.512
3. 1. In-House Management of Receivables (With Dynamic Discounting)
Particulars:
1. Cash Discount Cost:
o Revised discount rate: 2.5%
o 60% of customers avail discount.
o Cost of Discount: ` 90,00,000 × 60% × 2.5% = ` 1,35,000
2. Bad Debts (Reduced to 0.8% due to dynamic discounting):
o ` 90,00,000 × 0.8% = ` 72,000
3. Administration Cost: ` 1,20,000
4. Cost of Financing Receivables:
o Working Note 1 (Average Collection Period): (10 days × 60%)
+ (60 days × 40%) = 30 days
o Working Note 2 (Average Receivables): ` 90,00,000 ×
(30/360) = ` 7,50,000
o Working Note 3 (Cost of Financing):
 Cost of Bank Funds: ` 7,50,000 × 1/2 × 15% = ` 56,250
 Cost of Owned Funds: ` 7,50,000 × 1/2 × 14% = ` 52,500
 Total Cost of Financing Receivables: ` 1,08,750
Total Cost with In-House Receivables Management and Dynamic
Discounting:
Particulars Amount (`)
Cash Discount (` 90,00,000 × 60% × 2.5%) 1,35,000
Bad Debts (` 90,00,000 × 0.8%) 72,000
Admin Cost 1,20,000
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Cost of Financing Receivables 1,08,750

Total Cost (In-House with Dynamic Discounting): 4,35,750
2. Factoring Firm’s Offer:
Particulars:
1. Factoring Commission: ` 90,00,000 × 4% = ` 3,60,000
2. Interest Charges on Receivables: Factor Reserve: 12%, so
financing on 88% of receivables. Interest for 25 days: (` 90,00,000-
3,60,000) × 88% × 15% × (25/360) = ` 79,200
3. Cost of Owned Funds (Receivables not factored): ` 13,96,800 ×
14% × (25/360) = ` 13580
Owned Funds: (` 90,00,000-3,60,000) × 12% + 3,60,000 = ` 13,96,800
Total Cost with Factoring Firm:
Particulars Amount (`)
Factoring Commission (` 90,00,000 × 4%) 3,60,000
Interest Charges on Receivables 79,200
Cost of Owned Funds 13,580
Total Cost with Factoring: 4,52,780
3. Impact of Extending Credit Period:
If Zomo Ltd. extends the credit period to 75 days:
• Sales increase: 10% of ` 120,00,000 = ` 12,00,000
New total turnover = ` 120,00,000 + ` 12,00,000 = ` 1,32,00,000
Credit Sales (75%) = ` 99,00,000
• Increased Bad Debts (1.5%): ` 99,00,000 × 1.5% = ` 1,48,500
• Late Payment Penalty: Customers delaying beyond 60 days (40%):
` 99,00,000 × 40% × 5% = ` 1,98,000
A. Cash Discount Cost:
• Discount rate: 2% (since there’s no mention of dynamic
discounting in this case)
• Percentage of customers availing discount: 60%
• Calculation: ` 99,00,000 × 60% × 2% = ` 1,18,800
B. Bad Debts (Increased to 1.5%):
• Calculation: ` 99,00,000 × 1.5% = ` 1,48,500
C. Administration Costs (Remains the same):
• The administration cost stays fixed at ` 1,20,000, as no change
in admin structure is mentioned.

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D. Cost of Financing Receivables (Based on the new extended

credit period):
• Working Note 1 (Average Collection Period): Credit period
has been extended to 75 days for customers who don't take the
discount (40% of customers).
o Revised Average Collection Period: (10 days × 60%) +
(75 days × 40%) = 36 days
• Working Note 2 (Average Receivables): ` 99,00,000 ×
(36/360) = ` 9,90,000
• Working Note 3 (Cost of Financing Receivables):
o Cost of Bank Funds (15%): ` 9,90,000× 1/2 × 15%
= ` 74,250
o Cost of Owned Funds (14%): ` 9,90,000 × 1/2 × 14%
= ` 69,300
o Total Cost of Financing Receivables: ` 74,250 +
` 69,300 = ` 1,43,550
Revised Bad Debts after Penalty:
• Bad debts before penalty: ` 1,48,500
• Penalty earned: ` 1,98,000
• Net effect on bad debts: ` 1,48,500 - ` 1,98,000 = (-` 49,500)
(Zomo Ltd. would effectively earn ` 49,500 from penalties,
reducing bad debt cost.)
4. Total Cost Calculation:
Now, summing up all the components:
Particulars Amount (`)
Cash Discount (` 99,00,000 × 60% × 2%) 1,18,800
Net Bad Debts after Penalty (–` 49,500) -49,500
Administration Costs 1,20,000
Cost of Financing Receivables 1,43,550
Total Cost (In-House with Extended Credit Period) ` 3,32,850

5. Final Decision:
Option Total Cost (`)
In-House with Dynamic Discounting 4,35,750
Factoring Firm’s Offer 4,52,780
In-House with Extended Credit Period 3,32,850
Recommendation: Zomo Ltd. should extend the credit period and
continue in-house management. This option will not only reduce costs
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(due to lower bad debts offset by penalties) but also increase sales by
10%. Factoring is the least beneficial due to its high commission
charges, and dynamic discounting offers only marginal savings
compared to the credit extension option.
4. (a) The financing of current assets involves a trade off between risk and
return. A firm can choose from short or long term sources of finance.
Short term financing is less expensive than long term financing but at the
same time, short term financing involves greater risk than long term
financing.
Depending on the mix of short term and long term financing, the
approach followed by a company may be referred as matching approach,
conservative approach and aggressive approach.
In matching approach, long-term finance is used to finance fixed assets
and permanent current assets and short term financing to finance
temporary or variable current assets. Under the conservative plan, the
firm finances its permanent assets and also a part of temporary current
assets with long term financing and hence less risk of facing the problem
of shortage of funds.
An aggressive policy is said to be followed by the firm when it uses more
short term financing than warranted by the matching plan and finances
a part of its permanent current assets with short term financing.
(b) Over-capitalization and its Causes and Consequences
It is a situation where a firm has more capital than it needs or in other
words assets are worth less than its issued share capital, and earnings
are insufficient to pay dividend and interest.
Causes of Over Capitalization
Over-capitalisation arises due to following reasons:
(i) Raising more money through issue of shares or debentures than
company can employ profitably.
(ii) Borrowing huge amount at higher rate than rate at which company
can earn.
(iii) Excessive payment for the acquisition of fictitious assets such as
goodwill etc.
(iv) Improper provision for depreciation, replacement of assets and
distribution of dividends at a higher rate.
(v) Wrong estimation of earnings and capitalization.
Consequences of Over-Capitalisation
Over-capitalisation results in the following consequences:
(i) Considerable reduction in the rate of dividend and interest
payments.
(ii) Reduction in the market price of shares.
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(iii) Resorting to “window dressing”.

(iv) Some companies may opt for reorganization. However, sometimes
the matter gets worse and the company may go into liquidation.
(c) “The profit maximisation is not an operationally feasible criterion.” This
statement is true because Profit maximisation can be a short-term
objective for any organisation and cannot be its sole objective. Profit
maximization fails to serve as an operational criterion for maximizing the
owner's economic welfare. It fails to provide an operationally feasible
measure for ranking alternative courses of action in terms of their
economic efficiency. It suffers from the following limitations:
(i) Vague term: The definition of the term profit is ambiguous. Does it
mean short term or long term profit? Does it refer to profit before or
after tax? Total profit or profit per share?
(ii) Timing of Return: The profit maximization objective does not make
distinction between returns received in different time periods. It
gives no consideration to the time value of money, and values
benefits received today and benefits received after a period as the
same.
(iii) It ignores the risk factor.
(iv) The term maximization is also vague.
OR
(c) Modified Internal Rate of Return (MIRR): There are several limitations
attached with the concept of the conventional Internal Rate of Return.
The MIRR addresses some of these deficiencies. For example, it
eliminates multiple IRR rates; it addresses the reinvestment rate issue
and produces results, which are consistent with the Net Present Value
method.
Under this method, all cash flows, apart from the initial investment, are
brought to the terminal value using an appropriate discount rate (usually
the cost of capital). This results in a single stream of cash inflow in the
terminal year. The MIRR is obtained by assuming a single outflow in the
zeroth year and the terminal cash inflow as mentioned above. The
discount rate which equates the present value of the terminal cash inflow
to the zeroth year outflow is called the MIRR.

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PAPER 6B: STRATEGIC MANAGEMENT

ANSWERS
PART I

1. (A) (i) (a) (ii) (b) (iii) (c) (iv) (b) (v) (d)
1. (B) (i) (c) (ii) (c) (iii) (b)
PART II
1. (a) According to Mendelow's Matrix, environmentally conscious consumers
who influence industry standards fall into the Key Players quadrant.
These stakeholders possess both high power and high interest, making
them crucial to the success of Chic Threads’ sustainability-focused
initiatives. Their high interest stems from their alignment with the brand's
ethical and eco-friendly values, while their high power arises from their
ability to shape market trends, advocate for sustainable practices, and
impact on the brand’s reputation through their purchasing decisions and
influence within the industry.
As Key Players, these consumers require active engagement. Chic
Threads must focus on satisfying their expectations by providing regular
updates on sustainability efforts, maintaining transparent
communication, and incorporating their feedback to ensure continued
support. The brand should actively involve these stakeholders in its
decision-making processes by seeking their input on product design and
sustainability measures. Additionally, building strong relationships
through targeted marketing campaigns, collaborations, and awareness
initiatives will further solidify their trust and advocacy. Effectively
managing this stakeholder group is vital, as their support and satisfaction
directly contribute to the success of the brand’s eco-friendly clothing line.
(b) To target tech-savvy consumers for the new smartphone model, the tech
company can develop a marketing strategy based on customer behavior.
Consumer behaviour may be influenced by a number of things. These
elements can be categorised into the following conceptual domains:
• External Influences: Utilize online platforms and tech forums to
generate buzz around the new smartphone. Partner with tech
influencers and bloggers to review the product and create awareness
among tech-savvy consumers.
• Internal Influences: Appeal to the desire for innovation and
advanced features among tech-savvy consumers. Highlight the
unique selling points of the new smartphone, such as its cutting-edge
technology, performance, and design.
• Decision Making: Recognize that tech-savvy consumers are early
adopters who value functionality and performance. Provide detailed
specifications and comparisons with other smartphones to help them
make an informed decision.

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• Post-decision Processes: Offer excellent customer service and

support to address any technical issues or concerns. Encourage
customers to provide feedback and reviews to build credibility and
trust among tech-savvy consumers.

External Factors
Market Stimuli
Environmental
Factors Purchase and
Decision Post Purchase
Making Actions

Internal Factors

Figure: Process of consumer behaviour

By understanding the behavior of tech-savvy consumers and aligning the
marketing strategy with their preferences, the tech company can
effectively promote the new smartphone and attract this demographic.
(c) Strategic Performance Measures (SPM) are metrics organizations use
to evaluate and track the effectiveness of their strategies in achieving
their goals and objectives. SPM provides a framework for monitoring key
areas critical to the organization’s success, ensuring progress toward
desired outcomes and enabling timely adjustments to improve
performance. For GreenEdge Solutions, various types of SPM can be
utilized:
• Financial Measures: Metrics like revenue growth, return on
investment (ROI), and profit margins help evaluate the company’s
financial health and profitability.
• Customer Satisfaction Measures: Assessments of customer
satisfaction, retention, and loyalty indicate how well the company
meets customer needs.
• Market Measures: Market share, customer acquisition, and referral
rates reflect competitiveness and market position.
• Employee Measures: Employee satisfaction, engagement, and
turnover rate help track workplace culture and talent retention.
• Innovation Measures: R&D spending, patent filings, and new
product launches gauge the company’s innovation capabilities.
• Environmental Measures: Monitoring energy consumption, waste
reduction, and carbon emissions ensures the company aligns with
sustainability goals.

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Using these measures, GreenEdge Solutions can systematically assess

its strategy and make informed decisions to drive sustainable growth and
success.
2. (a) Connect Group has to make strategic changes for its survival. The
changes in the environmental forces often require businesses to make
modifications in their existing strategies and bring out new strategies.
Strategic change is a complex process that involves a corporate strategy
focused on new markets, products, services and new ways of doing
business. Unless companies embrace change, they are likely to freeze
and unless companies prepare to deal with sudden, unpredictable,
discontinuous, and radical change, they are likely to be extinct.
Three steps for initiating strategic change are:
(i) Recognise the need for change – The first step is to diagnose the
which facets of the present corporate culture are strategy
supportive and which are not.
(ii) Create a shared vision to manage change – Objectives of both
individuals and organisation should coincide. There should be no
conflict between them. This is possible only if the management and
the organisation members follow a shared vision.
(iii) Institutionalise the change – This is an action stage which
requires the implementation of the changed strategy. Creating and
sustaining a different attitude towards change is essential to ensure
that the firm does not slip back into old ways of doing things.
(b) 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:
♦ The 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 organisational estimate about its future
shape may awfully go wrong and jeopardise all strategic plans. The
environment affects as the organisationhas to deal with suppliers,
customers, governments and other external factors.
♦ Strategic management is a time-consuming process.
Organisations spend a lot of time preparing, communicating the
strategies that may impede daily operations and negatively impact
on 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
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and properly implement. These can be really costly for

organisations with limited resources particularly when small and
medium organisation create strategies to compete.
♦ Competition is unpredictable. In a competitive scenario, where
all organisations are trying to move strategically, it is difficult to
clearly estimate the competitive responses to the strategies.
3. (a) Yes, Easy Access and its rivals get advantage by this move. The new
bureaucratic process is making it more complicated for organizations to
start up and enter the Easy Access market, increasing barriers to entry
and thereby reducing the threat of new entrants. New entrants can
reduce an industry’s profitability, because they add new production
capacity, leading to increase in supply of the product, sometimes even
at a lower price and can substantially erode existing firm’s market share
position. However, New entrants are always a powerful source of
competition. The new capacity and product range they bring in throws
up a new competitive pressure. The bigger the new entrant, the more
severe the competitive effect. New entrants also place a limit on prices
and affect the profitability of existing players, which is known as Price
War.
(b) There are several basis of differentiation, major being: Product, Pricing
and Organization.
Product: Innovative products that meet customer needs can be an area
where a company has an advantage over competitors. However, the
pursuit of a new product offering can be costly – research and
development, as well as production and marketing costs can all add to
the cost of production and distribution. The payoff, however, can be great
as customers’ flocks are among the first to have the new product.
Pricing: It fluctuates based on its supply and demand and may also be
influenced by the customer’s ideal value for a product. Companies that
differentiate based on product price can either determine to offer the
lowest price or can attempt to establish superiority through higher prices.
Organisation: Organisational differentiation is yet another form of
differentiation. Maximizing the power of a brand or using the specific
advantages that an organization possesses can be instrumental to a
company’s success. Location advantage, name recognition and
customer loyalty can all provide additional ways for a company to
differentiate itself from the competition.
4. (a) Leatherite Ltd. is currently manufacturing footwears for males and
females and its top management has decided to expand its business by
manufacturing leather bags for males and females. Both the products
are similar in nature within the same industry. The strategic
diversification that the top management of Leatherite Ltd. has opted for
is concentric in nature. They were in business manufacturing leather
footwear and now they will manufacture leather bags as well. They will
be able to use existing infrastructure and distribution channels.

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Concentric diversification amounts to related diversification.

In concentric diversification, the new business is linked to the existing
businesses through process, technology or marketing. The new product
is a spin-off from the existing facilities and products/processes. This
means that in concentric diversification too, there are benefits of synergy
with the current operations.
(b) According to C.K. Prahalad and Gary Hamel, major core competencies
are identified in three areas - competitor differentiation, customer value,
and application to other markets.
♦ Competitor differentiation: The company can consider having a
core competence if the competence is unique and it is difficult for
competitors to imitate. This can provide a company an edge
compared to competitors. It allows the company to provide better
products or services to market with no fear that competitors can
copy it.
♦ Customer value: When purchasing a product or service it has to
deliver a fundamental benefit for the end customer in order to be a
core competence. It will include all the skills needed to provide
fundamental benefits. The service or the product has to have real
impact on the customer as the reason to choose to purchase them.
If customer has chosen the company without this impact, then
competence is not a core competence.
♦ Application of competencies to other markets: Core
competence must be applicable to the whole organization; it cannot
be only one particular skill or specified area of expertise. Therefore,
although some special capability would be essential or crucial for
the success of business activity, it will not be considered as core
competence, if it is not fundamental from the whole organization’s
point of view. Thus, a core competence is a unique set of skills and
expertise, which will be used throughout the organisation to open
up potential markets to be exploited.
OR

Strategic planning Operational planning

Strategic planning shapes Operational planning deals with
the organisation and its current deployment of
resources. resources.
Strategic planning Operational planning develops
assesses the impact of tactics rather than strategy.
environmental variables.
Strategic planning takes a Operational planning projects
holistic view of the current operations into the
organisation. future.

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Strategic planning develops Operational planning makes

overall objectives and modifications to the business
strategies. functions but not fundamental
changes.
Strategic planning is Operational planning is
concerned with the long- concerned with the short-term
term success of the success of the organisation.
organisation.
Strategic planning is a Operational planning is the
senior management responsibility of functional
responsibility. managers.

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