Page 12 - SCS May 2018 - Day 2 Suggested Solutions

CIMA MAY 2018 – STRATEGIC CASE STUDY

Economic risk is difficult to hedge as the exact sums are not known. With transaction risk, the sum
is known as there is a specific receipt or payment and a suitable hedging product can therefore be
sought. The sums involved with economic risk are more vague and long term, therefore internal
hedging is generally more effective, in particular netting.

Economic risk can be mitigated through diversification. Couchweb may already have a diversified
portfolio for suppliers. In this way, if the cost of one supplier increases due to currency
movement, it may fall in the case of another and two effects cancel out.

Economic risk can also be mitigated through creating a strong brand. Any increase in content
prices can be passed onto customers as they are willing to pay an increased price. The
product/service is therefore seen as “price inelastic”. Some may argue that Couchweb – as market
leader – could benefit from this in particular. Others, and certainly the board at Couchweb,
believe that subscriptions should be kept a low price to attract high volumes of subscribers, no
matter what content is on offer. Therefore Couchweb has to remain competitively priced. Both
sides, however, would argue that maintaining a strong brand will be an effective way of
maintaining subscription levels and is a strategy worth pursuing to help manage (economic)
currency risk.

EXERCISE 2

Email

To: Chet Nolan
From: Senior Manager
Subject: Controls over staff

The purpose of this email is to outline the controls that a company would expect to have in place
in order to guide the behaviour of employees. Couchweb, as an organisation, is not just operating
in Mayland, so you are right to be concerned about employee actions and their potential impact.

A useful framework when discussing controls over employees is that of management control. This
is defined as “the process of guiding organisations into viable patterns of activity in a changing
environment”. It is made up of the following:

Organisational structure

Unclear or complex organisational structures can lead to poor communication, missing
performance targets and enable fraud to be concealed. They are a key control for managing staff.

Couchweb may wish to examine its structure and evaluate whether it would enable unethical or
inappropriate staff activity to go unnoticed. Currently, Couchweb has a functional structure which
means they have specialists in each area that will be comfortable with what they are doing and
they should be supervised by someone who is familiar with the work they are carrying out. An
issue could be around adaptability to changes, a functional structure can be slow to change and in
a dynamic industry employees could become frustrated by slow responses and look to take action
themselves.

68 KAPLAN PUBLISHING