Strategic Professional

Strategic Business Leader

SBL – Mock Exam 1 Questions

Time allowed:
3 hours and 15 minutes, including reading, planning and
reflective time
This question paper is an integrated case study with one section
containing a total of 100 marks and ALL Tasks must be
completed.
All Tasks contain Professional Skills marks which are included in
the marks shown above
Do NOT open this paper until instructed by the supervisor.
This question paper must not be removed from the
examination hall.

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Exhibit: Introduction
This case study relates to three tasks.
Xaxa Co (Xaxa) is a major multinational food producer, based in Ayeland, a developed industrial
country in Europe.
You are a business consultant working for the Eminent Consulting Group (ECG) which has been
retained by Xaxa to advise the Xaxa board of directors on various strategic projects and initiatives.
It is currently March 20X8.
Having familiarised yourself with Xaxa and the industry in which it operates (the pre-seen
information) you are now provided with further new information (exhibits 1-5) to help you complete
three tasks.
The following exhibits provide information relevant to Xaxa:
1. Newspaper article about the powdered baby milk scandal, February 20X8
2. Letter to shareholders of Xaxa, February 20X8
3. Minutes of a Xaxa board meeting held June 20X8
4. Review of Performance
Pre-seen information, which you have already used to familiarise yourself with Xaxa and the
industry in which it operates, is also available during the exam.
This information should be used to answer each task.

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Exhibit 1 – Newspaper Article

Business News, 8 February 20X8

The controversy over Xaxa’s sales of powdered baby milk in developing countries just
won’t go away. The Food Company’s head office has been under siege for almost two
years from members of the “mothers who care” charity and institutional shareholders are
now voicing their disapproval.
The controversy began two years ago, when World Justice, a well-known charity, published a report
on the activities of three major food companies. The report claimed that these three “killer
companies”, including Xaxa, were “aggressively mis-selling” baby milk powders in developing
countries.
The report argued that several problems arise with the use of these products in developing
countries. These include the use of contaminated water in the preparation of the powdered baby
milk, and an inability of parents to read the instructions – hence making up the product at
insufficient concentrations and malnourishing the child. This has led to ill health and even deaths in
some cases.
The “Killer Companies” report received considerable attention in both the media and political circles.
The other two companies named immediately withdrew from the business but Xaxa saw an
opportunity to take the market share left by its rivals. It set about increasing its production
capacity accordingly. When asked by journalists why Xaxa had not also withdrawn from the
criticised business activity, the CEO John Maxwell stated that it was a profitable business
opportunity and he owed it to the shareholders to maximise their returns.
Mothers Who Care (MWC), a national charity concerned with infant nutrition, organised a campaign
against Xaxa. MWC initially organised protests outside the Xaxa head office and encouraged the
public to boycott a wide range of Xaxa’s products in addition to the baby milk powder. MWC
members started to use the phrase, “Xaxa kills babies” in the hope that it would become widely
adopted.
Last month, five institutional shareholders of Xaxa attended a meeting organised by prominent fund
manager, Hugh Oublie. This group of institutional shareholders led by Hugh Oublie (dubbed the
“Oublie Group”), has written a letter to the company asking some questions relating to the
powdered milk sales.
Hugh Oublie told this newspaper of his serious concerns about the governance arrangements at
Xaxa and the Oublie group’s poor attitude towards ethics. “There is a lack of balance in the board.
The two non-executive directors are not strong enough to question the strategy and raise the
problem of powdered baby milk as an ethical issue. It is this lack of non-executive scrutiny which I
believe is a major cause of Xaxa’s unwillingness to reconsider its powdered baby milk activity. I
have been a long-serving observer and shareholder of Xaxa and I’ve noticed the company becoming
more inward-looking in recent years. The group would like to see a change to the strategic
management of Xaxa. We believe that the board lacks concern for medium-term business risks
brought about by the baby food marketing. We also think that risk management is an area that
needs to be given priority at board level”.
The directors responded last week, issuing a statement to all shareholders. The strategic logic of
pursuing the powdered milk business is based on the company policy of carrying out those activities
that provide the most profit to shareholders, regardless of the impact on other members of society.
The statement gave the opinion that the recent reputation problems would be temporary in nature
and the directors are not prepared to move away from the baby food business which provides
shareholders with such good margins.
The Oublie Group has expressed its dissatisfaction with this reply and said it would seek to intervene
further in the affairs of the company.
Clearly the next few months are not going to be plain sailing for the food producer.

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Exhibit 2 – Letter to shareholders
Investor Relations Department
Xaxa Co
2 February 20X8
Dear Shareholders
There has recently been much adverse press comment about our company concerning the sale of
powdered baby milk in developing countries. A group of institutional shareholders, led by Hugh
Oublie, wrote to the board on 11 January 20X8 expressing concern about the sales of baby powder
in developing countries. The board has asked me to pass on to you the responses that were made to
the Oublie Group and to reassure our shareholders that there is nothing to be concerned about.
The questions that the institutional shareholders asked the board in their letter of 11 January 20X8
were as follows:
(i) Could the company explain the strategic logic of pursuing the powdered milk business in
poorer developing countries?
(ii) Is the board concerned about potential reputational damage with phrases such as “Xaxa
kills babies” being used widely in the media?
(iii) Would the Xaxa board consider withdrawing from the powdered milk business in poorer
developing countries because of the alleged health impacts on children in those countries?
The directors respond to these questions as follows:
(i) The strategic logic of pursuing the powdered milk business is based on the company policy
of carrying out those activities that provide the most profit to shareholders, regardless of
the impact on other members of society.
(ii) The board is not concerned with reputational risks because we believe that these are
temporary concerns which will soon be forgotten.
(iii) The board will not withdraw from the powdered milk business in these countries because,
with the loss of two competitors, profit margins and volumes are likely to be even higher in
future.
We hope that this statement will reassure our shareholders that the company continues to
endeavour to maximise the wealth of its shareholders over the longer term, and we believe that we
should not be distracted from this objective by this current press comment.
Yours sincerely

Xaxa Co Investor Relations

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Exhibit 3 – Minutes of a board meeting
Board Meeting Minutes
8 June 20X8
Members Present: Geoffrey Richardson (Chair), Archie Horton (Chief Executive Officer), Eszter
Szabo, Dieter Winter, Donald Mumford, Hugh Oublie, Juliet des Forges
Apologies: Jean Marie Avello
Absent: None
Proceedings
Meeting called to order at 2.00pm by the Chair, Geoffrey Richardson.
Chair’s opening statement
The chair welcomed Archie Horton, Hugh Oublie and Juliet des Forges to the board and thanked
former directors, including John Maxwell who had worked for the company for many years and was
a good friend of the Richardson family for their service. Recent events, including the bad publicity
surrounding the sale of powdered baby milk in developing countries, had resulted in shareholders
losing confidence in John’s leadership.
CEO’s presentation: the future direction of the company
Archie Horton, the new Chief Executive Officer, expressed his delight at being appointed CEO of
Xaxa before identifying three initial priorities:

 To investigate, as a matter of urgency, the claims made about powdered baby milk causing
harm. He would report his findings at the next board meeting in July, at which stage he would
propose what action the company should take.

 To restructure the business by integrating the operations of the Fresh Drinks division with those
of the Dairy Foods and Baby Foods divisions. Archie believes there are synergies to be gained
from this change.

 To modernise the company’s approach to corporate governance. Changes would include the
appointment of additional non-executive directors so that at least half the members of the
board would be independent non-executives. A risk committee, a remuneration committee and
an audit committee would be formed, and the internal audit function would be strengthened.
Archie Horton recognised that the changes he has proposed are significant. He referred to five
contextual features which will need to be considered if the changes are to be implemented and
managed effectively:

 Time
 Diversity
 Capability
 Readiness
 Scope
Reaction to the CEO’s presentation
Dieter Winter expressed concerns about Archie Horton’s suggestions. He believed that the media
furore over the baby powder would be forgotten within weeks. He also felt that the changes to
corporate governance proposed would add considerably to the costs of the company and suggested
that the proposals simply followed the latest corporate fashion. Dieter also pointed out that Xaxa
had grown from a very small company to the company that it is today without all these committees.
Donald Mumford was opposed to the integration of the Fresh Drinks division into the other divisions
of Xaxa. He believed that the nature of the businesses was very different to that of the Dairy Foods
and Baby Foods businesses and could not see how the division would benefit from greater
integration.
Eszter Szabo stated that she agreed that the longer-term interests of shareholders can only be
served if the views of the wider community are taken into account and that this would require a
significant change in the way Xaxa operates. Dieter Winter suggests that a Business Process Re-
engineering exercise could help in this.

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Shared service centre for finance
Eszter Szabo suggested that the board considers the centralisation of the finance function of Xaxa.
She suggested that a shared service centre could be set up in a country where wages are lower than
in Ayeland but where there is a well-educated work force available. The centre would provide
accounting services to Xaxa’s operations around the world, rather than the current situation in which
each country has its own accounting department reporting to head office.
It was agreed that a committee would be set up to develop a business case for this and the
committee would report to the board in due course.
The meeting adjourned at 3.00 pm.

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Exhibit 4 – Review of Performance
Financial performance of the three divisions for the most recent financial year along with
comparatives is as follows:
Year to Year to
31 December 20X6 31 December 20X7
Sales revenue $m $m
Dairy 11,130 11,195
Baby food 4,397 4,994
Fresh drinks 4,652 4,768
────── ──────
Total 20,179 20,957
────── ──────
Operating profit
Dairy 1,017 1,039
Baby food 835 940
Fresh drinks 982 992
────── ──────
Total 2,834 2,971
────── ──────

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Task 1
A non-executive director of Xaxa, Winnie Zaha, is concerned about the adverse publicity surrounding
the company’s sale of powdered baby milk in developing countries and the board’s refusal to
compromise.
Winnie is also concerned by comments made to the press by Hugh Oublie, a fund manager, which
stated that the board is only interested in maximising profits.
Winnie has approached the Eminent Consulting Group (ECG) for advice about social responsibility
and ethics.
(a) Write a letter to Winnie Zaha that challenges the board’s current ethical stance in
relation to ethical issues raised by the decision to continue to sell powdered baby
milk in developing countries and explains how the board’s approach may harm
Xaxa. (14 marks)
Professional skills marks are available for demonstrating scepticism skills in challenging the ethical
stance of Xaxa’s board. (4 marks)
A group of institutional investors who own a significant stake in Xaxa, the “Oublie Group”, are
concerned about the company’s approach to corporate governance.
(b) Write a briefing note to the board of Xaxa that advises on whether the Oublie
Group could attempt to intervene in the governance of Xaxa following recent
events and explains the methods of intervention that the Oublie Group could use
to change the governance at Xaxa to be more favourable to their interests.
(16 marks)
Professional skills marks are available for demonstrating commercial acumen skills in demonstrating
awareness of the wider external factors affecting Xaxa and why intervention might be undertaken.
(4 marks)
(38 marks)
Task 2
The directors of Xaxa have been considering the performance of the company’s three divisions.
Some board members have been questioning whether the Fresh Drinks division should be retained.
This division is largely autonomous, operating with little involvement from the Xaxa board. Although
the board is happy with the division’s profitability, the directors are not sure that it fits in with the
other activities of Xaxa.
(a) Write a report to the Board of Directors of Xaxa that analyses the current
performance of the Fresh Drinks division and considers whether the division
should continue to be held by Xaxa. (14 marks)
Professional skills marks are available for demonstrating analysis skills in commenting on the
performance of the Fresh Drinks division. (4 marks)
The directors are also concerned about the lack of growth in revenues in the Dairy division.
(b) Prepare two presentation slides, with accompanying notes, which identify and
outline two approaches to strategic growth, without making acquisitions, for the
Dairy division. (8 marks)
Professional skills marks are available for demonstrating communication skills in persuading the
board of the importance of risk management at board level. (4 marks)
(30 marks)

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Task 3
It is now July 20X8. In May 20X8, shareholders passed a resolution to remove the Chief Executive
Officer (CEO) and the two non-executive directors from the board.
Archie Horton, a well-known businessman who has turned around several poorly performing
companies in the past, was appointed as the new CEO. Hugh Oublie and Juliet des Forges, two fund
managers who work for institutions that own shares in Xaxa, were appointed as non-executive
directors.
Archie Horton wishes to make some changes to the structure of the board and the company. He
outlined these changes in a presentation to the Xaxa board in June 20X8.
Prepare a briefing note for Archie Horton that:
(a) Evaluates the relevance of the five contextual features of change he identified to
the initial priorities outlined in the ‘future direction of the company’ presentation.
(18 marks)
Professional skills marks are available for demonstrating evaluation skills when applying the
contextual features to Xaxa and in assessing the relevance of a shared services centre for Xaxa.
(4 marks)
(b) Explains the concept of a shared services centre and assesses its relevance for
Xaxa. (10 marks)
(32 marks)

End of Question Paper

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