1

The EL Car Company case

In this article T4 expert tutor Adrian Sims provides an analysis of the pre-seen material for

the August 27th and November 20th 2014 examinations.

Introduction

The case study for the T4 examinations on August 27th and November 20th 2014 is the EL

Car Company case. Passing either exam will require you to write a report to management at

EL, with supporting calculations, analysing the issues facing EL and making appropriate

recommendations. These must be backed up by justification, and be communicated

effectively.

You are given the case study in two stages. The pre-seen part of the material was made

available 6 weeks before the August exam and is the same for both exam sittings. It gives

you the opportunity to prepare yourself. On exam day you will receive the same pre-seen

again but with the addition of another four pages or so of unseen material.

The detailed issues you need to respond to will be given to you in the unseen material on

exam day. This unseen material will be different for each exam. Candidates taking the

November examination should not assume that issues in the August unseen will apply to

their exam too.

The purpose of analysing the pre-seen material is to ensure you understand the situation

and strategy of EL in advance. You have been given the chance to go into the exam room

with the sort of knowledge that someone working as a management accountant with EL

would have. Analysing the pre-seen properly helps reveal themes and issues that may

develop into requirements on exam day.

Here are my impressions of the pre-seen material and the sorts of issues you may be faced

with in the exam. This is a personal view and I don’t have any inside knowledge of the

examination papers that CIMA will set in August and November.

The strategic position of EL

A good place to start is with a SWOT analysis.

EL is a global car manufacturer that operates 7 plants across 4 continents. It is profitable,

cash positive, and has a good reputation for quality that is reflected in its very strong brand

equity (p7). It is growing rapidly, with sales volume rising 8.3% last year (p17). It commands

4% of world car sales which means it is comparable in volume terms to Kia Motors of South

Korea and Germany’s BMW, but significantly smaller than Toyota, GM, Ford and

Volkswagen-Audi. It is expected to achieve top ten status in the near future. It had X$2,572m

cash at December 2013 which is ‘adequate to fulfil the capital investment requirements of

the business going forward’ (p17) according to its FD.

2

However EL has a new CEO, B Tan, who lacks the experience of his predecessor, and

father, A Tan. The 55% shareholding of the Tan family secured this dynastic succession in

2013 or 2014, against the misgivings of senior staff, and it may also to insulate EL’s

management from the investor pressures from the institutional investors holding the

remaining 45% of shares. EL is described as using ‘inappropriate forms of organisational

structure, type of leadership and management style’ (p11) which are leaving managerial and

strategic problems unresolved. It is also said to ‘lag behind in some technologies’ (p5) which

are a crucial differentiating factor in the car market.

EL faces the same strategic challenges as many other car manufacturers. These can be

interpreted as either opportunities or threats to EL depending on its ability to rise to the

challenges. They are identified between pages 7 and 12 as industry overcapacity and

intense competition in all but the premium car segment, intensification of competition as the

emerging economies of China and India increase car production, the need to adopt

competitive strategies based on product and service differentiation to avoid price

competition, requirements for better supply chain integration, the need to relocate to benefit

from the market opportunities in the developing nations and to escape the comparative

stagnation of the mature economies, and the resolution of a gathering tide of industrial

relations difficulties. The pressure for more ecologically responsible engines and fuels, and

the reduction on the end-of-life pollution from scrapped cars adds another set of challenges.

For exam purposes you need to note that the information in the pre-seen does not seem to

extend beyond December 2013 and the 2014 forecast, on page 18, may be out of date too

by the time of your exam in August or November 2014. Therefore the SWOT you produce in

the exam room must be updated to incorporate any changes that have occurred in the

meantime. You will be notified of these changes in the unseen material issued to you on

exam day.

The following issues are present in the pre-seen material, and they form a useful set of

headings for us to explore the case further and to speculate on the issues you may face in

the exam room:

Models of strategic analysis

Globalisation

Product range decisions

Supply chain management

Leadership and management style

Investing for the future

None of these headings contain specific reference to management accounting techniques.

But you will be asked to complete at least two sets of calculations in the exam. The point to

recognise is that you need to present the findings from the management accounting

techniques you use in the context of the broader business and strategic challenges faced by

EL.

Models of strategic analysis

3

A year ago the pre-seen material concerned a multi-channel retailer and contained details of

its operations. The August examination required candidates to interpret the operations in the

context of Porter’s value chain analysis and to recommend improvements (and even

provided a diagram of the value chain to remind candidates). Therefore theory can be

examined in T4.

Porter’s five forces analysis. This model seems to be embedded in the pre-seen material.

Competitive rivalry from other global car firms is described on page 7 as ‘the most immediate

threat’ to EL as a consequence of overproduction of some 20 million units that drive down

prices down. Market entry is anticipated from the emerging economies of China and India

using their much lower cost structures to serve their home markets and later to export

cheaper cars to the global market. This trend that will be encouraged by the removal of trade

barriers under the auspices of the World Trade Organisation (WTO) referred to on pages 10-

11. Buyer power includes EL’s reliance on its investment in dealerships to sell cars (p7), the

contrast between ‘a large unsatisfied demand for cars’ in emerging markets and the

‘moderated..relatively declining’ demand in more mature economies (p10), and the power of

the internet to enable buyers to compare prices and buy online (p9). Supplier power

determines 60% of the cost of the car (p9) and is discussed throughout the pre-seen in

terms of the reliance of manufacturers on particular ‘global-mega suppliers’ for their technical

capabilities (p9) and for supporting the JIT systems of car makers (p10). Another element of

supplier power is its workforce and pages 11 to 12 refers to the threat from industrial

disputes in support of wage claims and changes to working conditions. These are affecting

EL already in its home country and its 6 other manufacturing locations. The power of

substitutes is represented by the copying of replacement parts (p9) and perhaps the

alternative engines for cars (p12). To this we could add the presence of a supply of reliable

used cars which forces manufacturers to continually update styling and features to

encourage the purchase of their new vehicles.

If these forces become stronger then EL’s profitability will fall. Therefore EL needs to reduce

its vulnerability to the power of these forces. This leads to the relocation discussed on pages

10 and 11 of the pre-seen material. Reducing costs of supply by relocating to lower-cost

countries or forming alliances with firms in these countries is one way to reduce supplier

power and dilute the threat of entrants. Buyer power can be reduces by moving to

developing markets which are undersupplied to achieve better margins and also to get inside

any trade barriers that may be erected against imports (p10).

Porter’s three generic strategies. According to Porter an effective long term strategy is one

that will increase and safeguard the long term profitability of EL. The pre-seen makes clear

that it is ‘increasingly important’ for EL to differentiate its products and goes on to detail the

different methods of differentiation available to volume saloon car makers (pages 8 & 9).

These methods include engine technology, visual design (including ‘heritage styling’ of the

sort introduced with the re-launched VW Beetle and continued by Mini and Fiat), build

quality, safety features, driving and handling, outright speed and performance, and customer

care. You can probably recognise different car brands that focus on particular types of

differentiation. Interestingly the list does not mention prestige of ownership, such as

Mercedes-Benz and Bentley, but it does state ‘affordability is a key differentiator’ (p8) which

4

seems to emphasise price which would run contrary to Porter’s use of the term

‘differentiation’.

The table on page 18 shows that EL may be in danger of being ‘stuck in the middle’ between

high price executive cars and low price compact cars. The following comparisons can be

extracted:

Range Executive Mid Compact

% of total forecast output 20% 60% 20%

% of total forecast revenue 36% 54% 10%

% of total forecast gross margin 42% 55% 3%

% of total forecast gross profit 48% 54% (3%)

This table seems to indicate that EL should stop making compact cars and instead devote its

resources to making executive cars and mid-sized cars, and page 5 tells us that EL has

been making efforts in recent years to move up market towards luxury sedan cars (here

sedan seems to imply larger cars as opposed to compact cars, SUVs or sports cars).

But we need to take care because the chart on page 13 refers to a different set of

classifications including premium and luxury models and sports utility vehicles. Page 6 tells

us that EL makes 42 models of car from 7 platforms. The point being that within the mid-

sized models of cars there may be different models of car. For example the A Series cars of

VW-Audi is a compact car platform that lies beneath the Skoda Octavia, the VW Jetta and

Golf and up to the Audi TT and Audi A3. Its B series mid-sized platform supports the Skoda

Superb, the VW Passat and the Audi A4, A80 and A90. The Bentley Continental GT is full

size luxury car that shares its D series platform with the Audi V8, A8 and the VW Phaeton.

Also there may be different grades of a particular model ranging from the entry model up to

the luxury or sports versions. And different engines and fuels. All will have different levels of

profitability.

I anticipate some exam-day calculations around Product Profitability Analysis in which you

may be required to establish the true costs, revenues and profits of a platform or a range to

help you to provide advice to management on changes to the product portfolio of EL. This

could be complex where different ranges use the same platform because if you advise EL to

stop making range X then the costs of developing and making the platform should be

reassigned to ranges W, Y and Z which will reduce their profitability. The data in the table at

the bottom of page 18 refers to production costs alone, whereas in the profit or loss account

on the same page we can see that in 2013 another 61% of gross profit was consumed by

selling expenses and administrative expenses. These non-production costs are referred to

on page 7 and include bill board advertising, commercials, sponsorship of sports events and

social contributions. There has also been enhanced dealership support. These costs may

also be attributable to particular models or markets. For example firms like VW-Audi and

Toyota support separate dealerships and promotional campaigns for their different brands.

And then there is the lifecycle consideration that loyal customers of the mid-size car are

likely to trade up to the executive version so EL should avoid removing the lower rungs of its

ladder.

5

Porter Diamond: EL is a successful firm that is thinking of relocating and competing in new

markets in developing countries. What can it learn from the Porter Diamond about how its

new competitive environment may differ from the one it grew up in or those where it

presently has factories? Factor conditions may be roughly similar because EL developed in

a low cost developing economy similar to the emerging economies it now wishes to sell to. It

also seems to maintain de-skilled jobs compared to Japanese rivals (p6) but since 1973 it

has become reliant on the Advanced Manufacturing Technologies (AMT) detailed on page 6.

This means it needs the advanced factors of skilled technicians and programmers in any

new factory it develops. Similar skills will need to be present in dealers’ workshops in order

to service EL’s cars. Demand conditions may pose a problem for EL. It is trying to move to

luxury sedan cars but, in addition to the urban elites in emerging markets, the main volume

of demand will be for small cars and SUVs suitable for the roads and towns where they live.

These cars must have much lower ‘affordable’ pricing points (p8). Related and supporting

industries support EL at present but on page 10 the case writer warns that its suppliers will

need to move with it and implies that EL has failed to cultivate the preferred supplier

partnerships that would encourage this. Finally under firm strategy, structure and rivalry EL

should remember that it enjoyed protection from competition when it grew and therefore

these same protections may be afforded by foreign governments to their own car firms or

they may require EL to enter joint ventures with domestic firms, or government enterprises,

to gain access to its national market.

Globalisation

The global structure of EL is very complex because it combines two forms of

divisionalisation. This reflects the ‘multi-domestic’ strategy of EL that seeks to differentiate its

products by making their attributes suitable for the driving conditions and tastes in each

regional market (p8), but at the same time tries to co-ordinate the customer offering across a

larger geographic area.

According to page 13 the firm has 6 production divisions that make 5 sorts of car (3 sizes of

sedan, SUVs, Premium models, and Luxury models). However these production divisions

are based on the regions in which the cars are made. Each product division manages sales,

marketing, R&D and production for the regional market in which they are established (p3).

ELs 6 R&D centres are attached to each of these 6 geographic regions (p4). A product

division will focus production on the sorts of cars that are most suitable for its regional

market. Hence mid-size cars are made by 2 divisions (A and D), luxury cars by 2 divisions (C

and F) and premium models are made by 2 divisions (C and E). Compact, SUV and large

sedans are each made by only one division (p13). These regional divisions provide cars to

each other and also share R&D and other findings.

A second structure of management is provided by ‘geographic divisions’. These seem to be

larger and based on three or more groupings, including Asia, Europe and North America (p

3). The role of these is not clear but it seems to be to ensure the regional product divisions

are making the right products for the geographic region. This regiocentric orientation relies

on there being underlying similarities in the cultures or needs of the countries in a given

region that can be accessed by a similar marketing mix of product, price, promotion and

place, albeit with small tweaks for language and economic differences. This is contrasted

6

with geocentric orientation of Ford (p3) which relies on the belief that the things motorists

have in common across the world are more significant than their differences, a trend to

homogeneity in tastes that is driven by greater travel, media penetration and the internet

(p8).

EL seems to want the best of both approaches. The ‘geographic divisions’ are continent-

wide and seek to maximise the benefit from shared platforms and from the transfer of

knowledge between the parts of EL. But a finer-grained set of 6 ‘regional product groups’ is

retained to allow local customisation because differentiation and sales could be lost if EL

acted as if tastes and needs are the same across Iran, Russia, Philippines and Japan merely

because all are in Asia.

The benefits of EL’s multi-domestic strategy are its focus on the customer needs and the

competitors in each market. This can create differentiation and better margins, especially if

EL is first to the market with its innovation (p9).

But page 11 refers to ‘inappropriate forms of organisational structure’ causing problems that

remain unresolved. One issue is the ‘enormous frustration’ of regional managers when the

geographic divisions at head office overrule product innovations (p5). Other problems might

include excessive costs arising from the duplication of the research and the loss of

economies of scale due to making an essentially similar car in two different regional

divisions. There are also references to problems in communication between the divisions of

EL (p3). This results in a poor transfer of knowledge and learnings. This is presumably in

part the effect of a ‘silo mentality’ in the regional product divisions. There would also be less

opportunity for EL to benefit from group-wide supply chain strategies if each regional division

is allowed to arrange their own purchasing.

Luxury car marques like Mercedes-Benz, BMW, Jaguar, and Lexus use a geocentric

orientation and promote their cars to urban elites using broadly similar marketing messages

in each country, rendered in different languages and with different faces on the posters. If EL

continues to move up-market then it may wish to consider doing the same.

I would not be surprised to see exam day unseen material requiring comments on

appropriate divisional performance measures to help contribute to achieving ‘the right

balance between adequate control on the one hand and an opportunity for participation on

the other’ (p3). The reference to measures for innovation on page 4 illustrates one such

measure.

Also changing organisational structure would provide the examiner with an opportunity to

require candidates to discuss change management.

Product range decisions

EL seems to want to go upmarket, but if it builds its business in emerging economies it may

have to produce more affordable and compact cars rather than luxury or premium cars.

The FD’s report on page 17 refers to a volume increase of 8.3% between 2012 and 2013.

But despite holding out the potential for further significant rises the forecast on page 18

7

shows only a 1.9% increase in 2014 (1,565,834/1,537,290 – data on page 17) but a revenue

increase of 9.1% (X$26,000m/X$23,828m). This is the result of a forecast rise of 7% in the

average price per car from X$15,500 to X$16,605 (p17). This is more than double the 3.3%

rise in average price between 2012 and 2013 (p17) and suggests that EL’s new

management team is moving away from the volume growth favoured by the former CEO in

favour of a strategy that focuses on value growth through better differentiation and continues

the policy of seeking a more favourable product-mix by switching away from the lower-price

compact cars in favour of the better prices and margins available on mid-size and executive

cars.

You should ensure that you can construct the forecast profit and loss account from the

volume and price assumptions on page 18. In the exam you may be requested to update this

forecast for different actual volumes, prices and costs.

Supply chain management

EL is part of a supply chain that extends from the makers of its components, through its

factories, and finally to the dealerships and the customers driving their cars. This supply

chain adds costs to EL but also adds benefits that customers will pay more to receive. EL is

a differentiated car manufacturer and therefore the main emphasis of its supply chain

management (SCM) should be on achieving differentiation in the ways described on pages 8

and 9 of the pre-seen material.

ELs present SCM is described on pages 2 and 3 as a network of suppliers around the world

which have been selected to support the six regional product groups. This suggests that

each product group has the autonomy to select its own suppliers.

EL has an inconsistent approach to supplier relations and has ‘shifted back and forth’

between the adversarial, even exploitative, approach of tough negotiation (p4) that seeks the

lowest price and then sometimes pursues a partnership approach to build a long term

relationship (p10).

This seems to be a reflection of its ‘multi-domestic’ approach to globalisation and a legacy of

the management philosophy of the former CEO, A Tan.

According to the purchasing maturity model proposed by Reck and Long (1988) the strategic

position of the purchasing function will be at one of four stages:

1. Passive- Purchasing is viewed as a clerical function and acts on requests from other departments

2. Independent- takes a more professional approach to purchasing including enhanced IT and communication technologies

3. Supportive-Purchasing is viewed as corporately essential and provides timely information on prices and availability

4. Integrative- Purchasing is integral to corporate strategy and management is involved in strategy development

8

EL has not reached the Integrative stage yet. For example page 13 shows that there is no

SCM management advising the CEO through the Advisory Committee. Page 3 of the pre-

seen material seems written to imply that EL is at the Supportive stage, referring to its

dependence on JIT and its critical reliance on IT systems (p3).

I anticipate a question requiring candidates to discuss the implications and benefits of

moving to the Integrative stage in Reck and Long’s model.

The implications of developing collaborative relations were identified by Cousins in his

Supply Wheel (2002). The 5 implications were the need for appropriate skills and

competences in suppliers and within EL, performance measures will be required to monitor

the performance of workgroups within EL but also the performance of supply partners, EL

will need an appropriate organisational structure within its production operations and also at

management level, there will need to be a portfolio of relationships which refers to improving

the quality of the relationships within EL and between EL and its partners by the sharing of

common and agreed goals, and finally proper cost benefit analysis in which purchasing is

not solely based on price but also upon the broader business benefits from the relationship.

The benefits of relationship building are summarised in Cousins’ Strategic Focused

Outcomes Model (2006) below. It is very tempting to interpret the references to JIT, sporadic

collaboration and reliance on tiered suppliers (p9) as describing how the manufacturing side

of EL belongs to quadrant A below. EL’s relationship with dealerships is briefly covered on

pages 2 and 7 and seems to lack many of the relationships in quadrant B below.

The pre-seen points towards EL needing to work in the ways described in quadrant C

through collaborating with upstream and downstream partners (ie suppliers and dealers) to

create better differentiation. The pre-seen specifically mentions knowledge sharing, NPD

and new market entry strategies. Some steps have been taken already such as the recent

Guest Engineering initiative (p4).

9

But moving to quadrant C has significant change implications for EL. Page 4 refers to EL’s

‘culture of authoritarian leadership’ which suggests that collaboration and participation have

not been encouraged before and the suggestion that EL’s inappropriate forms of structure,

leadership and management style may stifle proper communication (p11). It will affect the

conduct of relations with partners and how they are evaluated, and it will affect the process

of strategy formulation.

The pre-seen refers to a move from sequential to cross functional product development on

page 5. Sometimes called ‘parallel engineering’ this involves sharing continuous sharing by

teams of engineering drawings and specifications from the Computer Aided Design system

(CAD) so that, say, the engine designers can set to work once they see the rough sizes of

the proposed body shell for the new car. Parallel engineering normally extends to supply

partners so that the manufacturer of body panels can set to work designing machine tools to

make the panels as soon as they see the proposed body shell shape.

As one authority put it ‘Sharing knowledge and networking will be the foundations of future

success for us all. “Think Globally, Act Locally, but share and network totally” has to become

a future mantra both for the supply chain and for any customer focused knowledge sharing’

(Amery).

But the culture of EL will need to change in order for that to happen.

Leadership and management style

The leadership and management style was set by Mr A Tan and is described as ‘forceful’,

‘revered even feared’, ‘authoritarian’ but also ‘sure-footed’ and ‘gifted’ (pages 3 and 4). But

he left in late 2013 and now his son is in charge. And Mr B Tan has ‘limitations’ (p4).

The legacy of A Tan’s autocratic style includes the reluctance of managers to question

decisions (p3), the reputation of EL as a tough negotiator (p4), an ‘ongoing problem with

industrial relations (p6), and labour force with ‘fewer skills and less discretion’ than the staff

of rival car makers (p6). Perhaps most damaging is the absence of a successor with the

strategic vision needed to take EL forward.

I think it unlikely that the exams will feature requirements to recommend appropriate

processes for strategy formulation such as the rational approach versus emergent strategies

or some such. It seems clear that the Board of Directors does not determine the strategy of

EL but rather it is left for B Tan to do as his father did before him. But B Tan’s management

experience has been gained within EL and whilst he has a good short-term manufacturing

mind he lacks ‘strategic insight’ (p4). Whether or not his 8 advisors have strategic insight

remains to be seen. It seems unlikely because they have become accustomed to following

the orders of A Tan. This gives your examiner plenty of opportunity to request you to alert

them to and to explain strategic issues and considerations in your reports to the CEO, FD or

Board.

In changing the culture within EL you should be ready to discuss the value of management

development for the top team and other managers, and the value of having formal HR

processes for training and staff development. You might also want to revise your motivation

10

theories and knowledge of participation in budget formulation in order to assess the benefits

of better jobs, participation, and achievement at EL.

One area that may help introduce change and participation would be a change to payments

systems. Team work, rather than just the mechanistic jobs created by the assembly line

process described on page 6, will require team bonuses.

Another change could be to the organisation of production. Lean manufacturing often

involves the use of Flexible Manufacturing Systems (FMS) to enable the factory to

synchronise output to demand better by switching between cars with different specifications

as the orders come in. FMS requires both machine flexibility, the ability of machines to be re-

programmed to cope with a different design, and routing flexibility, the ability to use multiple

machines to conduct manufacture of a given part to avoid bottlenecks. Both forms of

flexibility can require factory workers to be flexible too and to be able to process different

parts or to conduct a wide range of operations within their production cells. The main

backbone stages of assembly line production, described on page 6, will stay the same, but

at the side of the track, and in the factories of the suppliers feeding the factory, the

preparation of body panels, carpets, doors, seats, instruments and power-train will need to

be flexible.

Process improvement, costing of products and processes, management accounting

techniques to support modern manufacturing and so on are all potential areas for questions.

The issue of the lack of an independent trade union seems to have been included to

underline the autocratic style of A Tan. I think it unlikely that you would be asked to discuss

the benefits of forms of unions and collective bargaining as this would be enormously

contentious in a global exam like T4. However the lack of independence of the union may

lead you to recommend alternative forms of worker representation in a change process.

The pre-seen material does not comment on the attitude towards management of the 45% of

shareholders who are not family members. They received their share of the X$119m

dividend last year (p15) representing 7.2% of profit which is not exceptionally high. But there

is no share price given so the dividend yield cannot be assessed. It is questionable whether

the shares of EL are publically traded because many stock markets would not wish to list

shares where external investors would be powerless to resist the whims of the Tan family.

Investing for the future

A requirement that asks you to advise management on a strategic investment decision

would provide the examiner with a good way to assess your grasp of the EL case and the

techniques of strategic management accounting. This is because such decisions require you

to describe the non-quantifiable benefits and considerations in addition to the numbers in

your NPV calculation.

EL is probably contemplating several sorts of investments:

New product development (NPD) such as new cars and models: including whether to go up-market or down market (pages 4, 5 and 8)

11

Relocation into emerging markets (p10)

Investment in new engine technologies such as electric cars or fuel cell technology (pages 5 and 12)

Investment in CSR programmes such as disaster relief (p7)

We can add other considerations to this list such as:

Investment in staff training and development

Investment in new production technologies, including new IT systems

Sharing investment via closer collaboration with supply chain partners

If you are requested to conduct an appraisal you should use the Suitability, Acceptability,

Feasibility (SAF) framework of Johnson, Scholes and Whittington. This will help you to get

credit for your assimilation of the pre-seen and unseen parts of the case.

Suitability will relate to the strategic position of EL, the challenges it faces, and its weaknesses.

Acceptability relates to its financial return, but also its risks and its impact on stakeholders such as staff, partners and investors and what responses it may provoke.

Feasibility refers to resources such as funds, management and manpower, and time constraints. We are told that EL has adequate funds for its anticipated growth (p17) but of course this was written before the new management team started to develop new strategies.

Other issues

Pre-seen material for T4 is always very rich with potential issues. I have covered the ones

that I thought took us into the heart of the case. There are other potential issues in the case

that I’ll mention briefly:

Risk management: EL has operating risks in its factories, it has managerial risks such as

potential failure of IT systems or industrial disputes, and it has strategic risks such as its

multi-currency exposures and its exposure to the different competitive and PEST

environments within its geographical spread. There are also risks from poor governance

given the appointment of an inexperienced CEO, the reliance on an Advisory Committee,

and perhaps a lack of external scrutiny from independent investors. You should be aware of

these and be willing to deal with one or more of these risks crystallising, or to suggest

procedures to manage and limit EL’s exposure to these risks.

Competitor information: EL’s need for competitor information (sometimes called ‘competitor

accounting’) is mentioned on page 9.You should be ready to explain the value of this and

how it might be obtained.

Ethics: this exam awards 10 marks for discussion of ethical issues. However EL faces no

obvious ethical dilemmas in the pre-seen. Therefore they will be introduced in the unseen

material on exam day. These could include how to deal with unsafe cars (p11), bribery or

unfair business practices, illicit obtaining of competitor information and the fair treatment of

staff and suppliers such as following a relocation decision.

12

The T4 assessment matrix and passing the exam

Passing the exam requires you to deal professionally with the issues in the unseen material.

In recent exams the unseen has contained 5 or 6 issues. Most candidates attempt to deal

with 4 of them in detail. This article has suggested some potential issues you may face

concerning EL.

Your script is marked against the Assessment Matrix on page 19 of the pre-seen material

(and also in the exam booklet on exam day). Here is a quick guide to what each assessment

criteria means and what marks are awarded for.

Technical: this means application of relevant technical theory, mainly from the Enterprise

pillar papers in the CIMA qualification. A good SWOT analysis is always rewarded, but it

must contain the issues from the unseen material and not just some pre-learned points from

the pre-seen material. Also valuable are the Ansoff matrix, stakeholder map, model of

motivation and so on if they are relevant to the issues you are analysing or discussing.

Application: marks here are mainly for number work. It is vital that you do the numbers

competently, understand what your results mean, and employ them in your discussion of the

issue and to support your recommendations. Your competence as a management

accountant is being assessed so you must do numbers. A small number of the marks, say

about 5, are available for applying the SWOT and other Technical models to the issues.

Diversity: this means employing relevant car industry and other real-world business

examples to illustrate the issues and support your recommendations

Focus: this mean ensuring you discuss the things that matter in the unseen, and that you do

provide a full analysis of each, rather than writing a report that skates around and doesn’t

give sufficient detailed attention to the key issues

Prioritisation: sifting through the 6 or so issues in the unseen to select the 4 you want to

write about, and then putting these in a rank order of importance to EL and the attainment of

its goals. A good guide here is to recognise that problems are things that must be dealt with,

they are threats. Proposals are things that can be dealt with, they are opportunities. Big

threats should be given a higher priority than bit opportunities.

Judgement: assessing the weight of the issues and commenting on them. If they are threat

describe their impact and then outline alternative ways to resolve them. For opportunities

assess their suitability, acceptability, and feasibility. The key to good marks here is the depth

of the points you make. Rather than say ‘this is a bad thing’ say ‘this is a bad thing

because..’, and if you are considering an investment don’t just say ‘it has a positive NPV ‘

instead say ‘it has a positive NPV but also it is consistent with the goals of EL and it carries

limited risks…’

Ethics: this is the requirement to notice things that have a moral dimension, pointing this

out, and to recommend ways that management can deal with the issue to best balance the

moral and commercial considerations. This may involve treatment of staff, infringement of

13

laws unsafe practices and so on. Having a separate section in your report headed ‘Ethical

Issues’ is a good idea. Usually 1 of the 6 issues in the unseen is purely ethical and you can

deal with this as a 5th issue in addition to the 4 commercial issues you have discussed. 1 or

2 ethical issues may be included as aspects of commercial opportunities, such as buying

cheaper parts which increases profits but compromises safety. Discuss the ethical aspect in

the Ethics section of your report, and the commercial aspects in another section.

Logic: up to 20 marks are awarded for recommendations on what to do about the 4

commercial issues. A good approach is to tell management what they should do in a clear

sentence or two. Then justify the recommendation by telling them why you recommend this.

Finally tell them how to set about doing it. The key to good marks here is to ensure that your

recommendations do follow on from the analysis you made of the issue in Judgement, but

also that your recommendations are well-justified and supported with practical steps. Rather

than say ‘ the firm should change behaviour by using Lewin’s three step approach’ be

practical and say ‘ the first step in changing behaviour would be to make staff aware of the

intentions of management. This should be done by briefing team leaders and then

commanding them to hold factory floor meetings’.

A further 10 marks under Logic is for a small requirement, called Section (b). This is to

assess your ability to communicate with non-accountants by taking one particular issue and

summarising your analysis and recommendations into a presentation, email, or short briefing

document.

Integration: these marks are awarded on the basis of the overall helpfulness and

professionalism of your report. If you say nothing, or if it doesn’t make much sense, you will

be awarded only 0 or 1 marks under Integration. But a report that flows, has good number

work, and that comes to sensible and clear recommendations will get 4 or 5 marks.

I hope its clear that the bulk of the marks are given for the heart of the report – the numerical

work and the analysis of issues and the quality of recommendations. This is where

Application marks (15), Judgement marks (20), Logic marks (20) and marks for Focus and

Integration (5+5) are awarded – 65 marks from a total of 100. You cannot pass this exam

without making a good attempt at the issues. Some candidates spend too long trying to pick

up Technical, Diversity and Ethics marks. Most T4 marks are awarded for the discussion of

the issues and the use of properly calculated numbers to support the discussion.

The need for industry knowledge

EL is not a real world firm, but the industry it exists in is real enough and you need to do

some research and understand it to the same level as you understand the industry you work

in. Between now and the exam it’s a good idea to pretend to also work in the car industry.

Some good places to start are

www.oica.net

www.autoalliance.org

14

www.acea.be

www.edmunds.com

These websites are full of real-world examples and references of the sort you will need to

research before you take the exam.

Practice

To pass the T4 exam you need to practice dealing with the sorts of issues you may

encounter in the exam and also in writing an effective answer in three hours.

Formal classroom and online programmes usually provide this as a major part of the course

and the quality of the course depends very much on the quality of the mock exams they

provide, the marking, and the feedback you receive.

A Google search under ‘CIMA T4 mock exams’ provides some initial sources for privately

produced mock exams and some course providers and publishers also provide a marking

service.

The CIMA website contains free downloads of past real exams and solutions and these

provide good practice of the key skills, providing that you take the time to master the relevant

pre-seen for the sitting first.

One essential resource is the Post Exam Guides for each exam. Compare the comments the

examiner makes in the PEG with the exam paper to understand what the examiner was

looking for and where marks were gained and lost. It shows the skills you need to develop.

I hope this article has helped to get you started.

Good luck in your exam!

Adrian Sims is visiting tutor and author specialising in T4. Adrian will be teaching the EL

case for private trainers in Europe, and for CIMA in China and Sri Lanka.

November is the final T4 examination. This form of exam was pioneered by CIMA in 2001

and CIMA has published my written analysis articles on the 27 sets pre-seen materials since

then. These have covered industries from ranging from boat building to house building and

from telecoms to toys. This seems the right time for me to thank the examiners for their help

over the years and CIMA for its encouragement.

adrian@adriansims.com